Edited Audit Manual PDF

Co-operative Societies Audit Manual
[CO-OPERATIVE AUDIT MANUAL

CHAPTER I
I-1 INTRODUCTORY
1. Background and objectives. -Maharashtra has always been in the forefront in the field
of co-operation. Be it simple agricultural credit societies, urban banks, housing or large
industrial undertakings like sugar factories or spinning mills, Maharashtra has always led
the way. The first co-operative society in the country was started in a small village in the
erstwhile Mumbai state nearly century ago. From then onward, it has been a success story
and the time has now come when co-operators have establishing their own fertilizer
complex, Oil Complex and dairy complex.
2. Historical retrospect. - Audit of co-operative societies, traditionally has been audit by

the officers of the co-operative Department working under the control of the Registrar on
whom is cast the statutory responsibility for the annual audit of all co-operative societies.
It is perhaps due to the fact when the select committee appointed to draft the first Co-
operative Societies Act, considered the question, it had only two alternatives either to
provide for audit by Government officials or leave the societies to themselves to get their
accounts audited by unqualified auditors, as even the Companies Act then in force did not
prescribe any qualifications for the auditors. In fact, there was no professional body of
auditors then in existence. Sir Fredric Nicholson, whose monumental report paved the way
for enactment of a special statute for registration of co-operative societies, was of the firm
opinion that the “law should not only provide for establishment of an audit, but for
efficiency of such audit.” The Select Committee reporting as early as the beginning of last
century, realizing that the co-operatives would require a number of privileges and
concessions, stressed the need for a compulsory annual Government audit “for all
registered societies. Such an audit is necessary to prevent fraud on unintelligent ryots,
which, apart from the immediate hardship, which it would cause, could not fail to have a
most fatal effect in discrediting the system of co-operatives. We, therefore, consider that
an annual Government audit should be obligatory in the case of all registered co-
operative associations and that such audit should include (a) an examination of all books,
registers and accounts with particular attention to overdue debts and (b) a valuation of
the assets and liabilities of the associations”. The consideration behind this view is to safe
guard of interest of Government investments in these societies, and unavailability of
qualified accountants, as well as the members of the societies are not aware of financial
transactions and business practices.
3. Statutory provisions for compulsory official audit. -Presenting the new legislation (the
Co-operative Societies Bill) Sir D. Ibbetson, in his admirable memorandum, had observed
that since co-operative societies were to enjoy exemption from the general Law and
facilities of a special nature, it was necessary “to take such precautions as may be
needed in order to prevent speculators and capitalists from availing themselves,
under colorable pretexts, of privileges which were not intended for them”. He added,
“It has been considered advisable that an official audit should be compulsory in all
cases and this has been provided in Section 21. There is no doubt that such an audit will
give the outside public and the members, more confidence in management, and even when
no financial assistance may be received from Government, the societies will obtain
valuable privileges under the Act and it is reasonable that they should at the same time be
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obliged to submit their accounts too some check, which must in this country take the form
of an official audit”.
4. Developments during 1974-2012. - In view of the above considerations, the provisions

in the old Act passed in 1904, regarding the system of audit of co-operative societies
through the agency of Government officers responsible to the Registrar, found a place also
in the 1912 Act and subsequent State Legislations. So far as Maharashtra is concerned, the
same provisions with further amplifications were contained in the 1925 Act, which
brought into operation a system of State controlled and State managed audit, continue to
exist even to-day, in spite of later developments in the concept and the technique of audit
and the setting up of a statutory body for regulating the profession of audit. A host of
committees and commissions, both at the State and all-India level as well as a number of
conferences of co-operators have considered the question of the agency for audit and have
largely come to the conclusion that audit of co-operative societies should continue to be
State controlled and that the Registrar of co-operative Societies, should continue to
shoulder the responsibility for arranging for the annual audit of co-operative societies,
burdened as he is with numerous other important duties and functions. This is because,
every body is agreed that audit should not only be efficiently conducted, but should also be
independent of the co-operative societies to be audited.
The time has changed, the burden on the Registrar has taken a huge mounting
position as the number of societies has been increased tremendously, and has crossed the
number of lacs of societies. The Registrar is unable to audit the all societies, within the
prescribed time limit, that the every society must be audited once in the year. The changes
have taken place in 1986 by amending the Cooperative Societies Act. The Section 81 has
been amended as 81 (1) (b) introducing the concept that, the societies should got their
accounts audited themselves, as the qualified auditors are available, for those societies to
which no Government Assistance or any finance from Financial Institutes is not available.
These societies have to get their accounts audited once in a year from the panel of auditors
maintained by the Registrar, or by a Chartered accountant holding a certificate in
cooperative audit issued by the institute of Chartered Accountants of India. However, the
right of auditing these societies has been reserved by the Registrar in case he ascertains the
reasons for the same, and can assign the audit to the Government Auditors, by recording in
writing the reasons for such audit.
The task of audit of Government Auditors has been limited by the Section 81(1)
(A), to the audit of societies which have been given financial assistance including
guarantee by the State Government, or Government undertakings, from time to time, and
the accounts of the Apex Societies, State, and District Level Federal Societies, District
Central Cooperative Banks, Cooperative Sugar Factories, Urban Cooperative Banks,
Cooperative Spinning Mills, District and Taluka Cooperative Sale and Purchase
organizations, and any such Society or class of Societies which the State Government
may, from time to time, by notification specify. Then after, the Government had specified
the Urban Cooperative Credit Societies, Salary Earner’s Cooperative Societies, and
Primary Agriculture Cooperative Credit Societies by a Notification No. CSL. 1096/ CR-
146/ 15-C, dated 11.11.1996.
4.a) 97th Constitution amendment :-The Government of India has amended the
Constitution of India, in 2009 by adding Article 243Z, under which the State Government
is required to amend their cooperative societies Act, as provided in the Constitution. The
provision in Constitution allows the Societies to get their accounts audited once in a year
from the panel of Auditors prepared by the Registrar and approved by State Government.
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Accordingly the Section 81 of the Maharashtra Cooperative Societies Act is entirely

amended, authorising the societies to get their accounts audited from the Panel of auditor,
approved by the State Government and prepared by the Registrar or an authority
authorized by State Government in this behalf, possessing required qualifications and
experience as may be prescribed.
4b) This has given the societies to choose auditor from the panel approved by the State
Government. The professional auditor includes the Chartered Accounts and their firms,
Certified auditors and Government auditors as explained under the section 81 of the Act.
I –2 AUDITING
1. Financial accounting and auditing. -Accounting is the art of recording and classifying
business transactions in terms of money. In other words, it is the job of the accountant to
record the multitude of business transactions from original documents like vouchers,
statements, receipts, etc., and also their accumulation in books of original entry like the
cashbook and the journal and also the ledgers. Auditing is the verification of the accuracy,
genuineness or authenticity and correctness of the accounting records and statements and
reporting on these to the proprietors. Auditing may be done by internal auditors or by
statutory auditors or by both. The internal auditors maintain a continuous check while the
outside statutory auditor provides periodical review as an outsider.
Financial accounting and auditing is primarily concerned with the determination of
income earned and ascertaining financial position as on a particular date. Financial audit is
concerned with the critical review and interpretation of financial statements, namely, the
profit and loss account and the balance sheet, together with the supporting schedules
furnishing particulars of the various assets and liabilities. The aim of financial auditing is
to safeguard the interests of the proprietors and the creditors of the business.
2. Auditing as a tool of management. -It has now been realized that accounting and
auditing, which is the review aspect of accounting, can also be regarded as a method of
management or as a tool for improving the efficiency or effectiveness of management.
Although managerial or administrative accounting and auditing deals with the same data
collected from the financial accounts and records, they are not confined to information of a
business transaction. Its object is to bring about scientific managerial planning and ensure
sound managerial decisions. This it does by furnishing complete historical data and
pointing out consequences of alternative decisions and helps to prevent errors of judgment.
It makes possible comparison of performance with anticipated results.
3. Financial auditing is a review of the results of past actions. Administrative auditing is

a critical review of the soundness and propriety of the decisions taken in the past and helps
management to correct mistakes and improve methods.
Societies, which have undertaken manufacturing or processing activities, are
required to maintain cost accounts in order to ascertain the costs of their products. Cost
accounts to be reliable, must be reconciled with financial accounts. Although cost
accounts are primarily meant for furnishing information to the management about the
costs under different heads incurred for manufacturing or processing, review or auditing of
cost accounts forms part of regular auditing and auditors in charge of societies, which have
undertaken manufacturing and processing activities, must be conversant with cost
accounts so as to be able to intelligently criticize them.
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4. Cost Auditing - Section 81 (2A) and (2B) was introduced in 1986 regarding Cost Audit
for the societies, or class of societies to whom the cost accounts are to be maintained and
cost audit from the member of Institute of Cost and works Accountants of India should be
done. In case the Government has opinion that it is necessary in the public interest and in
relation to any society, or class of societies, for ensuring management thereof in
accordance with sound business principles or prudent commercial practices, the cost audit
may be ordered. However, the cost audit rules are not framed till this date or no such order
has been issued by the Government. The Central Government has made compulsory for
the cooperative Sugar Factories to maintain Cost Accounts and get done the Cost Audit
from the Cost Accountant.
In 2013, the above cost audit provisions are amended with respect to “society’s
interest” instead of “public interest” and the responsibility of cost audit is cast on “the
Society” instead of “the Registrar”.
5. Operational efficiency and Ratio Analysis :- Operational efficiency is measured by

working out of number of ratios connected with the various aspects of financial
management. In order to fulfill adequately his role as friend, philosopher and guide of
the societies, the auditor should be able to report to the management not only what has
happened but how it has happened and also to predetermine and point out what would
happen, so as to assist the management in arriving at sound decisions. Ratio analysis is a
vast subject and involves a close study of not only methods of financial accounting and
cost accounting, but also knowledge of the technical aspects of the business transactions.
It has, however, to be observed that the audit of Co-operative Societies as at
present conducted, though wide in scope in fact wider than the field covered by auditor of
joint stock companies is still basically financial in nature and very few auditors attempt to
conduct what may be termed an efficiency audit or methods audit. The number is
increasing as the auditors are being trained for efficiency and methods of audit. Since most
of the Societies, which have undertaken manufacturing and processing activities, do not
maintain some sort of cost accounts which can be reconciled with the financial accounts so
that their accuracy can be tested, auditors of large manufacturing undertaking like co-
operative sugar factories or spinning mills, will have themselves to carry out what can be
termed as “efficiency audit”.
6. Various types of audit. - The concept of audit has undergone many changes during the
past few years and very few auditors can now be content with merely reporting on the
balance sheet and the profit and loss account. The diversity of activities undertaken by Co-
operative societies and the complexity of their transactions, necessitate that the auditor
should not only have a sound theoretical ground in the writing up of accounts and their
scrutiny in audit, but also call for a high degree of skill and discernment so as to be able to
comment on the financial as well as technical aspects of the transactions. The various
aspects of audit work enumerated in the foregoing paragraphs provide a glimpse of what is
expected of the future auditor. Various types of audits are introduced in the past two
decades, such as Social Audit, Energy Audit, Technical Audit, Policies, Procedures and
systems audit, Information System audit, M-VAT Audit, Tax Audits, etc. these are also to
be get acquaintanced by the auditors.
7. Recent changes in Cooperative Audit :- After 97th constitutional amendment, the

Maharashtra Cooperative Societies Act is amended to give effect to the constitutional
amendment. There are many changes in the Act to provide autonomy to the societies,
member economic participation, principle of democratic control, appointment of
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professional independent auditor and to remove the control of Registrar and Government.
The Societies has been empowered to appoint their auditor from the panel of auditors
prepared by the Registrar and approved by the State Government. The auditor has to carry
out the audit as provided in Section 81, Rule 69 and Auditing standards as notified by
State Government. The audit fees shall be as prescribed and notified by the State
Government for such audit.
I-3 MANUAL
1. Need for the updating Manual. - Since 1962, the audit wing of the Department was
separated from its administrative wing primarily with a view to attract better talent and to
ensure better quality of audit from those who had opted for the audit line. During these
years, there has not only been a steep rise in the number of Co-operative Societies of
different types, but there has also been a well marked diversification in their activities and
a vast expansion of their business operations. It has always been of policy of the State
Government of encourage Co-operatives to take up new and varied activities. Besides
granting them a number of privileges and tax concessions, the State has also been granting
them liberal financial assistance not only by granting them loans and subsidies, but also by
contributing towards their share capital. The state has become a business partner sharing
their profits as well as their losses. Auditors have thus an added responsibility of
safeguarding the interest of the State by ensuring that the funds provided by it, are not
misappropriated or misutilised. It is, therefore, necessary that audit should be not only
strict, but also efficient and for this purpose, the auditors have to equip themselves with
necessary knowledge and apply due skill and diligence in the performance of their duties.
The techniques of accounting and auditing have not remained during the period,
but have undergone numerous changes and have developed significantly over the years.
Co-operatives are rather slow in adopting new and improved system of accounting and
look to their auditors to guide and assist them to maintain systematic accounts. This
manual attempts to set out in detail the practices and procedures which are appropriate in
light of present day circumstances having due regard to the handicaps suffered by the Co-
operatives arising out of their small size limited resources and democratic set up.
During the years following independence, there has been a vast increase in the
number and types of Co-operative Societies and a considerable expansion of their
transactions. Whereas the auditor of the good old days had to audit accounts of simple
rural and a few urban Societies, with small turnovers, the auditor of today has to audit
complicated transactions of a variety of Societies, like Sugar Factories, Spinning Mills,
Co-operative Banks, Industrial Estates. Housing Colonies, etc. Although he might have
adequate theoretical grounding and basic skill, he would still require guidance on a
number of important matters. After the insertion of Section 81 (1)(b) in the year 1986, the
statutory audit is carried out by the certified auditors and chartered accountants. The
auditors are appointed by the societies as per amendment made in 2013. The need for a
sort of handbook containing instructions and guideline on all-important aspects of his
work is being keenly felt. This manual is meant to give him practical guidance in the day-
to-day performance of his duties. No attempt is made to impart any theoretical knowledge
regarding auditing to him as there are many books on audit which he can refer for his
guidance. However the auditors need to avail additional information and reference
material from various sources from time to time as may be required.
The first audit manual was prepared in 1974 for the guidance of the auditors. Since
then, several changes have taken place, in Accounting and Auditing. The conventions of
accounting became the accounting standards. The standards for Auditing are also formed
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at National and International level by concerned accounting bodies. The recording of

accounts has been computerized, which need different methods of audit. The Cooperative
Societies have also changed there accounting policies, and accounting procedures, and
have computerized their accounts and management information systems, which requires to
introduce the guidance to the auditors. The contemporary knowledge of auditing is
required to be introduced.
In view of the 97th constitutional amendment, the Maharashtra Co-operative
Societies Act is amended Section 81 (5 B), to give effect for criminal and civil action to be
initiated by the auditors. There are other amendments in the Act and Rules which also
requires the auditors to acquaint himself. The societies have to provide accounting policies
adopted for preparation of their accounts to the auditors. Therefore, it has been felt
necessary to update and revise the audit manual.
2. Objectives of the Manual. -The objectives of this Manual are, therefore, as under: -
(i) To serve as a ready handbook of practical guidance to auditors of Co-operative
Societies.
(ii) To serve as a codified handbook of departmental instructions and Government
instructions relating to Co-operative accounts and audit.
(iii) To serve as a ready reference book to auditors and those who are responsible for
maintenance of accounts and to decide the scope of audit of there societies.
(iv) Above all, to help to improve the quality of audit work and maintain a high
standard of audit.
3. Scope of the Manual. -In this manual, an attempt has been made to explain the general
principals of audit, the various techniques adopted by the auditors and the processes and
procedures to be carried out during the course of audit in general and audit of Co-
operative Societies in particular with special reference to the circular instructions issued
by the Registrar from time to time. The special features of the audit of different types of
societies are also dealt with. The criteria laid down by the Registrar for awarding audit
classification, the procedure for follow-up of audit, the basis and scale for assessment of
audit fees and procedure for recovery of audit fees is explained in detail. Besides
explaining the general procedure of work, such as examination of cash methods to be
adopted for reviewing operational efficiency and the tests to be applied for determining the
financial soundness, operational efficiency and Co-operative character of different types of
societies is also explained. Instructions for the drafting of audit reports and special reports,
filing in the schedules and other accompaniments to the audit memo are given, which, it is
hoped, will ensure uniformity in the drafting of audit reports. Standard audit programs and
instructions regarding audit of different types of Societies are explained. Important legal
decisions affecting auditors are also given. The modern method of recording accounts on
the computers has been explained with its verification systems.
It has, however, to be emphasized that having due regard to the diversity of the
activities undertaken by the Co-operatives and the complexity and variety of their
operations, it is not possible in a manual of this size and nature to deal exhaustively with
all the problems to be met with by the auditors. It is also not claimed to be a complete
statement on the work involved. However, an attempt has been made to deal exhaustively
not only with routine matters, but also with most of the important aspects of audit work
with which many of the members of the audit staff may not be familiar. The auditors will
find in this manual solutions to most of their problems, which, they face during the course
of discharge of their duties. In brief, it is hoped that this manual will provide necessary
guidance to the auditors and enable them to equip themselves with the requisite
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professional skill and knowledge for the performance of their duties. Considering the
evolution in the field of accounting and auditing, the techniques of auditing through
computers and auditing with computers is given in this manual for ready references.
I-4 AUDIT: MEANING AND SCOPE
1. Meaning of Audit. -The origin of audit can be traced to the need to ensure that a person
who came into possession of money or property belonging to another has properly
accounted for by him. Thus, in the beginning, it was merely a scrutiny of cash transactions
and the auditor merely “heard” or was satisfied with oral explanations to “pass” the
transactions as genuine and correct. The Industrial Revolution in England gave a Philip to
the organization of large undertakings for carrying on large-scale industrial and
commercial operations. As the capital required for these ventures was beyond the ability
of any one individual or even a partnership, it has to be collected from a large body of
persons who formed a joint stock company and became their-share holders. The
management of these companies, however, had to be entrusted to a small body of persons
elected by the general body of the share-holders, who came to be taken as Directors of the
company. Proprietorship and actual management having thus been separated, the
shareholders needed some arrangement under which they would be assured that their
interest had been properly safeguarded. In order to see that the board of directors has
conducted the operations of the company in the best interests of the shareholders and also
to assure them about the safety of their investments, accounts maintained by the directors
had to be subjected to an independent verification by a person appointed by the
shareholders. The auditor thus serves as a link of trust between the shareholders who are
the proprietors of the business and the board of directors who manage it, which is
absolutely necessary in any system of corporate finance.
2. Definition of Audit. -The concept of audit, however, has undergone considerable

change during the course of time and audit has now come to mean “such a close and
careful examination of the account books, documents and other records of a business or
other organization as shall enable the auditor to satisfy himself whether or not the
balance sheet and the profit and loss account have been properly drawn up, so as to
exhibit a true and fair view of its financial operations.” An audit may, therefore, be
described as a “critical examination by an auditor, of the documentary and other
evidence from which the profit and loss and the balance sheet of an organization have
been drawn up, in order to enable him to report that they present a true and fair view of
the summarized transactions for the period under review and of the financial position of
the organization as at the end of the period.” From the above definitions, it will appear
that the auditor examines the evidence, mainly consisting of account books, registers,
vouchers, statements, minutes, etc. and some times, he has to go even behind the books of
account and inspect the actual assets themselves and call for confirmations from clients. It
has, however, to be remembered that the examination of the accounts must be such as to
enable the auditor to report thereon.
The Institute of Chartered Accounts of India in its publication of the Statement of
Standard Auditing Practices :- Basic principles Governing an Audit (SAP 1) describes
audit as “ the independent examination of financial information of any entity, whether
profit oriented or not, and irrespective of its size or legal form, when such examination
is conducted with a view to expressing an opinion thereon.
It means that, the auditor has to express an opinion on the financial statements.
Financial statements generally mean the statement of affairs as on particular date (balance
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sheet) and statement of operations (profit and loss accounts / Income and expenditure
statements) for a financial year of any entity. The opinion on financial information is
expressed after careful examination of books of account, documents, records and
vouchers. That is, before an opinion is pronounced, evidence is gathered and tested to
form the basis for framing an opinion.
The Institute of Chartered Accountants Of India has issued a comprehensive
definition describing modern auditing. As “ a systematic and independent examination of
data, statements, records, operations and performances (financial or otherwise) of an
enterprise for a stated purpose. In any auditing situation, the auditor perceives and
recognizes the propositions before him for examination, collects evidence, evaluates the
same and on this basis formulates his judgment which is communicated through his
audit report”. Another concept of auditing is “ Auditing is the process by which a
competent, independent person accumulates and evaluates evidence about quantifiable
information related to a specific economic entity for the purpose of determining and
reporting on the degree of correspondence between the quantifiable information and
established criteria.
The information under audit need not necessarily by accounting information.
However, information must be in a verifiable form. There should be standards or criteria
for evaluation of the information. And the auditor should not only be a competent person
but he should also have an independent mental attitude.
It would thus be seen that certification of the balance sheet and the profit and loss
account has come to be looked upon as the main function of audit. In the minds of the
general public, however, prevention and detection of frauds and embezzlements
constitutes such as important function of the auditor as to overshadow his other functions.
This is quite natural, since auditing involves a complete or at least an exhaustive checking
of the transactions and the manner in which they have been recorded.
3. Purpose of Audit : - Detection of frauds and errors. -Examinations of accounts by an

independent outside agency no doubt acts as a deterrent and moral check and also
facilitates early detection of frauds and errors. Since the auditor has to carry out an
intelligent and exhaustive scrutiny of the accounts before he can report on them, there can
be no question about the auditor’s responsibility for detection of frauds except those which
have been deliberately perpetrated by those who are at the helm of affairs or those
committed by trusted employees which even with the application of due skill and
diligence, he could not be expected to detect.
The sound and more important function of auditor are to detect error. As regards
detection of errors, it is needless to point out that both from the point of view of the
management and the employees themselves, this is a great advantage. The auditor during
the course of his examination of the accounts and inspection of documents would come
across numerous errors and irregularities, which might be bona fide, mistake resulting
from carelessness or ignorance on the part of the accountant. Such errors and irregularities,
which are common in most co-operative societies and can be considered as minor or of on
importance should be got rectified and corrected as and when they are noticed. However,
it has also to be born in mind they might also have been committed deliberately in order to
conceal frauds and misappropriations, perpetrated by the management or the employees
and would call for a more detailed probe. Although, most of the errors that we come
across in well managed co-operative societies are likely to be mere clerical errors which
can be and to should be got rectified on the spot, there are also likely to be errors of
principal which will have to be explained to the management. The mistakes which cannot
be rectified on the spot shall be, issued in writing to the management for rectification and
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to submit rectification report. Care should be taken that the errors which are of the
serious nature including fraud, embezzlement, misappropriation, misapplication and of
serious financial irregularities should be reported in audit report.
The arithmetical accuracy of the accounts can be tested by drawing up the Receipts
and Payments Statements of the trial Balance. However, mistakes in posting of personal
ledgers can only be detected when the personal ledger balances do not agree with the
balance in the totals or the controlling accounts. In computerized accounting methods this
work of the auditor is no more required. However, he has to verify the correctness and
efficiency of the system and procedure followed for data processing. Besides clerical
errors discussed about there would also be other types of errors. These are compensating
errors, which compensate or cancel each other. There are also errors of principle, many
times knowingly committed by those in charge of management. These are difficult to
detect and only a very careful examination would reveal such errors. Errors of principle
arise when a transaction has been entered in a fundamentally incorrect manner, such as
entering revenue expenditure as capital expenditure, or when the normally accepted
principles have not been followed such as wrong valuation put on an asset, failure to bring
into accounts known liability or provide adequate depreciation on wasting assets. Auditors
should take atmost care while passing the entries for compensating errors, principle errors
and rectifying errors as these may lead to frauds and misappropriations subsequently.
4. Advantages of Audit. -The main advantage to be derived from a system of audit is that
the proprietors of the business, who, in case of a co-operative society, are its members, the
depositors and financing agency of the society and the Government which also has a
considerable financial stake in the affairs of co-operatives, are assured that the accounts
are properly maintained and they are not being defrauded by dishonest office-bearers or
employees. They will have present before them statements showing the true position of the
affairs of the society and its earnings. Audited accounts are also relied upon for purpose of
assessment of income tax and sales tax and also for disbursement of Government loans
and subsidies. The directors or the committee members are also assured that there would
be no undue criticism against them. The auditor’s report would thus protect the
management from unwarranted criticism and at the same time assure the shareholders and
the creditors about the safety of their investment.
I-5 DUTIES AND RESPONSIBILITIES OF AUDITORS
1. Duties of the co-operative Auditor. : - We have seen in a previous paragraph that audit
in its generic sense is a critical and intelligent examination of the books of accounts of a
business with the vouchers and other documents in orders to be satisfied that the
operational results for a particular period and the exact financial position of the business as
at the close of the period as reflected in the profit and loss account and the balance sheet
are correct. The auditor has also to see that, these statements have been prepared in
accordance with the generally accepted accounting principles and the accounts give all the
information required by law. The duties of the co-operative auditor are, however, much
more comprehensive. It has been laid down in section 81(2) of the Maharashtra Co-
operative Societies Act, 1960; the audit shall include an examination of the overdue debts,
if any, the verification of cash and securities and valuation of the assets and liabilities of
the society. Examination of overdue debts has been made a special responsibility of the
auditor, in view of the far reaching consequences, such overdue debts have on the working
of co-operatives, in particular, co-operative credit institutions, which are in large numbers.
In any system of credit, existence of overdue debts in a symptom of weakness and it is
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necessary, therefore, that the position of co-operative societies in regard to their overdues
should be under constant watch with a view to reducing there proportion and arrest their
future growth.
As regards the verification and valuation of assets and liabilities, the responsibility
of the auditor of a co-operative society is the same as those of the auditor of a joint stock
company. However, having due regard to the vast financial stake of the State in the affairs
of many of the societies, the special position allotted to co-operative societies in the
general scheme of development particularly in regard to the improvement of the lot of the
weaker sections of the society and the numerous concessions and privileges enjoyed by
them, audit of co-operative societies has to be made more strict. Close and careful
inquiries will have to be made to ensure that the assets have been properly valued and that
all known liabilities have been brought into account.
Besides this, the Section 81(2) lays down the duties of the auditor which is as
under. The audit shall be carried out as per auditing standards notified by the State
Government from time to time and shall also include examination or verification of
following items, namely
(i) Overdues of debts, if any.
(ii) Cash balance and securities and a valuation of the assets and liabilities of the
society.
(iii) Whether loan and advances and debts made by the society on the basis of security
have been properly secured and the terms on which such loans and advances are made or
debts are incurred are not prejudicial to the interest of the society and its members.
(iv) Whether transactions of the society which are represented merely by book entries
are not prejudicial to the interest of the society.
(v) Whether loans and advances made by the society have been shown as deposits
(vi) Whether personal expenses have been charged to revenue account
(vii) Whether the society has incurred any expenditure in furtherance of its objects
(viii) Whether the society has properly utilized the financial assistance granted by
Government or Government undertakings or financial institutions, for the purpose for
which such assistance was granted
(ix) Whether the society is properly carrying-out its objects and obligations towards
members.
2. Responsibilities of the Auditor. : - It will thus be seen that the auditor of a co-operative
society has not merely to check and certify the correctness of the balance sheet and the
profit and loss account, but has to examine many other things besides. Co-operative audit
embraces all the circumstances, which determine the general position of the society and its
achievements. Thus, for example, in case of co-operative credit societies and banks, the
auditor has to see that the loans are given for proper objects and periods and on adequate
security as per latest concepts of co-operative finance. He has also to examine the
repayments in order to ascertain book adjustments, improper renewals, etc. He has further
to note whether timely action has been taken for recovery of dues and overdues. In case of
agricultural marketing societies, he has to see that the society has society has undertaken
pooling, grading and joint sale of members’ produce and does not act merely as a
commission agents. In case of farming societies, he has to see that the lands been pooled
and cultivated jointly. In case of other societies, he has to see that the business is
conducted on proper lines in accordance with co-operative principles and that all canons of
business and financial propriety are being duly observed. In short, the auditor is required
to satisfy himself that the society has been working on sound lines and that the members
take sufficient interest in the affairs of the society and that the committee members
10
understand duties and responsibilities and attend to them with due regard to co-operative
principles.
It has always to be borne in mind that the auditor of a co-operative society has not
merely to check the accounts and point out faults, but he has to function as its friend,
philosopher and guide. The members of the committee look to him for guidance in all
important matters. He has to act as the financial adviser of the societies and suggest ways
for improving their affairs and increasing their usefulness to their members.
As per amendments in 2013 in MCS Act, auditor has to submit special report to the
Registrar in respect to irregularities in financial transactions and losses to the societies. He
has also to submit specific report regarding criminal action to be taken against the culprits
and lodging the first information report (FIR) with the concerned authorities after
obtaining permission from the registrar.
3. Auditor’s powers to go beyond the books of accounts. : - The powers given to the
auditor under Section 81(3) to summon any person who is or has been an officer or
employee of the society and any member or past member of the society and call for
information and require production of books or documents in their possession, gives the
auditor power to go beyond the books of accounts and records of the society and
supplement the information gathered from the books of accounts by making personal
enquiries with the members and others and satisfy himself about the genuineness and
correctness of the transactions recorded in the books.
If any deficiency or loss has occurred as a result of negligence, misfeasance or
misconduct on the part of the committee or any officer or member of the society, the
Registrar, acting on the report of the auditor, has power to assess damages caused to the
society for the loss suffered by the society. For this purpose, auditor has to submit special
report as provided in sub section 5B of the section 81. The auditor has thus not only to
play the critical role of a watch dog to watch the interests of the members and creditors of
the society, but the blood hound spirit into him has also to be brought into play to ensure
that unsocial elements, which control the affairs of the society, do not avail of the agency
of the society or its funs for their personal benefits.
Under provisions of Rule 49 of the Maharashtra Co-operative Societies Rules,
1961, no bad debts can be written off unless they are certified as irrecoverable by the
auditor.
4. Auditor to assist and advice management of societies. - It will thus be seen that in
many respects, the work of the auditor of a co-operative society exceeds the boundaries of
what is generally considered as audit in its general sense and includes within its purview
not only the critical and verification aspect, but also an appraisal from the viewpoint of
operational efficiency, financial soundness and co-operative vitality. It also includes
tendering advice and rendering assistance on all matters connected with the working of the
society. The auditor has, therefore, to cultivate a keen sense of observances and he should
try to make his audit as effective and useful as possible, by observing and examining every
thing that he comes across during the course of performance of his duties. He should at all
times think of the possibilities for improvement and tender suitable advise to the
committee.
The auditor should also remember that he has to deal not only with the books of
accounts and records, but has also to supplement the information available from the books,
by calling for clarification and explanation. He has to put intelligent questions so as to
elicit the required information, without arousing any suspicious in the minds of those
whom he questions. During the course of performance of his duties as an auditor, he has to
11
deal with all sorts of people from junior ledger clerks to highly paid executives and
directors who are honorary workers and are particularly susceptible to any sort of adverse
comment and are, therefore, required to be handled with great care and utmost courtesy.
I-6 COOPERATIVE SOCIETIES AUDIT: FEATURES AND DIFFERENCES
1. Difference between the audit of co-operative societies and of joint stock companies
Auditor’s responsibility to the Registrar and Society - We have so far seen that the main
object audit of a co-operative society is to safeguard the interests of the members and the
creditors. The management is also required to be made aware of the errors and
irregularities committed by them and the paid staff and advised to rectify them. However,
it has to be remembered that audit of all co-operative Societies once at least every year is
the statutory responsibility of the Registrar and Society and hence the primary
responsibility of the auditor is to the Registrar and Society who has appointed and
authorized to carry out the audit. As early as 1915, the Maclegan Committee appointed by
the Government of India to review the progress of the Co-operative movement in the
country had reported that. “It is through audit alone that an effective control can be
exercised over the movement and its was clear that it was never intended that the
Registrar’s activities outside audit should be confined to inspection or enquires. The
auditing staff from whatever source they may be paid, are in our opinion, responsible to
the Registrar and must be mainly controlled by him. Their reports are primarily
intended for his information.”
2. Other distinguishing features: - A joint stock company is undoubtedly an association

of capitalists, who have come together only to earn profits. The important result of audit
they normally expect is to disclose the amount of profit available for being distributed as
dividend. In case of Co-operative Societies, however, the Registrar to whom the auditor
has to submit his report, is keen to know how far the society has been successful in
achieving the objects for which it was established, the extent to which the members have
benefited and whether the working of the society is being conducted according to Co-
operative principles, as well as its earning capacity.
The scope of Co-operative audit as we have seen, is much more wider than that of
a joint stock company. Whereas the auditor of a joint stock company has merely to report
on the correctness of the profit and loss account and the balance sheet, the auditor of a Co-
operative Society has to see many other things besides.
In a joint stock company, the directors are shrewd businessmen whereas the
members of the committee of Co-operative Society are mostly laymen and do not possess
any business acumen. Audit of a co-operative society has, therefore, to be not merely
critical, but corrective and educative.
The auditor of a joint stock company is not concerned as to how the business is
managed. It is not his duty to advise the management. The auditor of a Co-operative
Society, however, is its friend, philosopher and guide. The members of the committee
expect him to guide and assist them in the management of the society.
Whereas the auditor of a joint stock company has merely to report whether the
profit and loss account and the balance sheet has been drawn up in accordance with the
provisions of the Companies Act, the auditor of a Co-operative Society is required to point
out infringement of the provisions of the Act, Rules and the byelaws of the society. Where
these infringements have financial implications, the auditor of a Co-operative Society has
to point out them specifically so that the Register may institute proceedings for assessing
damages, etc.
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It will also have to be noted that whereas a company may include in its profits all
accrued interest and other unrealized income, Co-operative societies cannot take into
account overdue interest. All interest accrued or accruing in accounts in which the
principal is overdue has to be excluded from profits.
It will thus be seen the Co-operative audit has to be more searching and
comprehensive so as to gauge and assess the extent to which members and the general
public have benefited by the society and the approach of the auditor has to be different
from that of an auditor of a joint stock company.
3. Special features of Co-operative Audit: - We have already seen that the duties of the
auditor of a Co-operative Society are much more extensive than those of the auditor of a
joint stock company, who has merely to certify the correctness of the balance sheet and the
profit and loss account. It has further been laid down in sub-section (2) of section 81 that
audit shall include an examination of the overdue debts, if any, the verifications of the
cash balance and securities and a valuation of the assets and liabilities of the society. The
auditor of a Co-operative Society has not only to conduct his audit according to the
normally accepted principles, but, since his responsibility for the proper conduct of audit,
he has to follow the provisions of the act, rules and Byelaws and instructions issued by the
Registrar. These features have been elaborated in the following paragraphs.
4. Examination of overdue debts: - Examination of overdue debts, as we have seen has

been made a special responsibility of the auditor in view of the far-reaching consequences
of such overdue debts of the working of credit societies which outnumber the rest.
Examination of overdue debts also involves a careful assessment of chances of their
recovery and their classification into good, doubtful and bad. The auditor has also to see
the due action is taken for recovery of dues and overdues.
5. Valuation of assets and liabilities. - The term “valuation” used in this sub-section is a
wide term and denotes the proper application of the various test that are generally applied
by auditors for the valuation of different types of assets and also includes the verification
of such assets. The auditor has also to see that all known liabilities are brought into
account and where the amounts are not certain, the estimates made have been reasonable.
The auditor has also to see that the provisions made are adequate. The auditor has to also
see the standard accounting principles for valuation of assets and liabilities are followed
by the society, and variation to them should be recorded in his report.
6. Adherence to Co-operative principles. - Co-operation is a method of doing business

and in conducting their business operations; Co-operatives are required to observe certain
well-defined principles. The amended Act provides society as “ society means a
Cooperative society registered, or deemed registered under the Act, which is an
autonomous association of persons, united voluntarily to meet their common needs and
aspirations through a jointly owned and democratically controlled enterprise and adhering
to the cooperative principles and values.’ Whereas a joint stock company is an association
of capitalists, a Co-operative Society is an association of individuals who have come
together merely not to earn profits on their investments but to secure resources and
services required by them. The important result expected in the audit of a joint stock
company is the amount of profit available for distribution while the primary concern of the
auditor of a Co-operative Society is to ascertain how for the society has achieved the
objects for which it has been organized and how far it has succeeded in furthering the
moral and material well being of its members.
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7. Observance of the provisions of the Act, Rules and Byelaws. -The auditor of a joint
stock company does not bother to see whether the administration of the company is
conducted on right lines. A Co-operative auditor, however, is not only required to point
out all cases of infringement of the provisions of the Act, Rules and the Byelaws of the
society, but also of the directives contained and suggestions made in the various
Government Notifications and Circulars issued by the Registrar and Government from
time to time. Where these infringements have financial implications, he has to include
them in a separate schedule with necessary particulars so as to enable the Registrar to
initiate action under section 88 of the act. However, where they have no financial
implication, he has to submit a special report furnishing particulars and suggesting
remedial action by the Department and the federal society of which the society is
affiliated.
8. Furtherance of public welfare and safeguarding of public funds. : - We have seen that
Co-operative societies have an important role to play in bringing about the desirable
change in the moral and material well being of our people. The agency of Co-operative
Societies is availed of wherever possible in preference to other forms of business
organization and a number of valuable privileges and concessions, both administrative and
financial, have been granted to them as the cost of the taxpayer. The auditor during the
course of his audit has to see that these privileges and concessions are not misused and
that the operations of the society are conducted with due regard to the interests of the
common man.
9. Personal verification of members and examination of their pass books: - We have

seen that in order to ascertain whether the books of accounts show the correct position of
the affairs of the society, the auditor has not only to compare the entries in the books with
the receipts, vouchers, statements of accounts and other documents, but has also to make
thorough inquiries by calling for explanations and personal verification of the members’
accounts. In case of agricultural credit societies and other rural societies, the auditor is
required to call for and examine the entries made in the passbooks issued to members and
get the outstanding balances confirmed in his presence. Personal verification of members’
accounts is a very good safeguard to prevent manipulation of accounts by dishonest
employees and office-bearers of societies and by putting intelligent questions, many cases
of frauds and other serious irregularities have come to light which would not otherwise
have been possible.
We have already seen that under provisions of Section 81(3) of the Maharashtra
Co-operative Societies Act, the auditor has been given power to summon members and
compel them to produce their pass books and statements, receipts and other documents
issued to them by the society in the course of their dealings with it. The auditor has thus
powers to go behind the books of accounts and these he must avail of in order to ascertain
the true position of the society.
10. Assessment of damages. -If any deficiency or loss has occurred which can be
attributed to the negligence, want of proper care, misfeasance or misconduct on the part of
the committee or any officer or member of the society, the auditor has to submit special
report in accordance with the provisions of sub-section 5B of Section 81. The Registrar,
acting on the special report of the auditor and after examining into the conduct of the
persons concerned, has power under section 88 to assess damages and order the person
responsible to pay to the society the amount assessed by him. The auditor has thus not
14
only to play the critical role of watching the interests of the members and creditors of the
society, but also, in view of the numerous opportunities available to unscrupulous office-
bearers to commit frauds and misappropriations, the blood hound spirit in him has also to
be brought into play, wherever necessary.
11. Certification of Bad debts. : - Rule 49 of the Maharashtra Co-operative Societies

Rules lays down that bad debts can be written off only when they are certified as such by
the auditor. The procedure laid down in the Rule requires that all bad debts and
irrecoverable losses, before they can be written off against the Bad Debts Funds or the
Reserve Fund or the Share Capital, should have been certified as bad debts or
irrecoverable by the auditor. However, this provision is not applicable to Co-operative
Credit Structure Entity (i.e. PACS, DCCB, SCB). Such entity shall write off its bad debts
on approval of its General Body in conformity with guidelines of RBI and NABARD.
12. Awarding audit classification to the society. : - After completion of his audit, the
auditor is required to award an audit classification to the society, which he has audited. All
Co-operative Societies are awarded a classification letter, A, B, C, or D according to
certain well-recognized principles as laid down in this manual and as may be specified by
Registrar from time to time. The audit class of a society indicates the degrees of success
achieved by it, its financial stability and its operational efficiency. A list of societies
together with their latest audit classification is published by the Registrar.
12-A . Adherence to Accounting Policies :- Societies have to adopt the accounting

policies which must be in consistent with Accounting Standards issued by State
Government or The Institute of Chartered Accountants of India (ICAI). The society has to
prepare and publish the adopted accounting standards with changes thereon in the notes
given with financial statements. The accounting policies adopted by the society which are
consistently followed by the society. If changes are made in the accounting policies which
has no material effect on financial statements need not be reported by the auditor.
However, the changes in the policies which have material effect on the financial
statements, need to be reported by the auditor.
I-7 QUALITIES OF AUDITORS
1. Auditor- (1) a friend, philosopher and guide: – We have already seen that the auditor
of a co-operative society has to function as its friend, philosopher and guide. He has to
tender advice on all financial and administrative matters whenever his advice is sought and
suggest ways for improvement of their affairs and for increasing their usefulness to their
members. Co- operative audit has not only to be critical but also curative and educative.
The auditor has not only to point out mistakes, but has also to suggest ways to avoid their
recurrence in future. He has also educate members of the committee and also the ordinary
members and point out ways for improving it’s working and increase its usefulness.
The auditor has not only to criticise the actions of the management, but has always
to think of the possibilities for improvement and tender suitable advice to the committee.
2. Qualities required of an Auditor. - The foremost quality that an auditor should have is
an abundance of commonsense. He has to cultivate a keen sense of observation and has
always to be on the look out for whatever is unusual or irregular. Since the time at his
disposal is always limited, being required to complete the audit within the time prescribed
in the Act, he has to plan and carry out his work methodically and thoroughly so as to
15
ensure that all important matters receive adequate attention and nothing which is irregular
or out of the way escapes his notice. The work he has to do being mechanical and tiring,
he is required to possess a good deal of patience. All the same, he is required to apply due
care and skill in the performance of his duties lest he may be charged with negligence. He
has always to be diligent and hard working and at the same time guard himself against
methods which tend to be mechanical or appear to be short cuts and are, therefore, fatal
to accurate and efficient audit. Accuracy, concentration and patience are the three
invaluable qualities, which every auditor must possess. He is also required to have a quick
grasp and ability to read between the lines so that he cannot be deceived.
Since the work involved is voluminous and many times beyond the capacity of any
one individual, the auditor has to rely on his assistants to carry out most of the routine
work so as to keep himself free to attend to the more important matters. He has, therefore,
to map out his work methodically and distribute it amongst his assistants, with clear
instructions as to what is to be done, why it is to be done and how it is to be
done, he has further to instill in them a sense of loyalty and faithfulness and at the same
time to encourage and assist them to think for themselves and make their own
contributions. All this calls for considerable supervisory skill and administrative talent.
3. Attitude towards non-officials. - It has to be noted that the auditor has not only to deal
with the books of accounts and records, but has also to supplement the information
available from the books by calling for clarifications and explanations. But putting
intelligent questions, he has to elicit the required information without arousing any
suspicions in the minds of those whom he questions. During the course of the performance
of his arduous duties, an auditor of a co-operative society has to deal with all sorts of
people from simple junior clerks to highly placed executives and director, who are shrewd
businessmen and many of whom on account of their wealth and social status might not
regard the auditor as an important person. The auditor should, therefore, possess necessary
tact and talent to deal with men and matters. He has always to remember that office-
bearers of co-operative societies are mostly honorary workers, who are particularly
susceptible to any sort of adverse comment and are, therefore, required to be handled with
great care and due courtesy. At the same time, he should have the courage of his
convictions and be bold enough to express in no uncertain terms his findings and his
opinion on the genuineness and propriety of the transactions examined by him.
4. Honesty and sincerity: - Lastly, he is required to be honest and sincere. He must not
certify what he does not believe to be true and must take reasonable care and apply due
skill before he believes that what he certifies is true.
It has to be noted that co-operative societies have an important place in the economic set
up of our country. The active assistance, large-scale financial involvement and even
partnership in their affairs by the State necessitate that the auditor should apply more than
ordinary care and skill in the discharge of his duties because audit is the only known
method to bring to light errors and grave irregularities.
5. Independence of the Auditor;- The auditor should be independent in performing his

duties as an auditor. He should express his opinion without fear or favour.
I-8 POWERS AND LIABILITIES OF AUDITOR
1. Powers of the Auditor: - Sub-section (3) of section 81 of the Maharashtra Co-operative

society Act, 1960, provides that the auditor for purposes of his audit, shall have access to
16
all books, accounts, documents, papers, securities, cash other property belonging to the
society or in the custody or possession of the society or any of its officers. He has also the
power to summon any person in possession of or responsible for the custody of any such
books, accounts, papers, securities, cash or other property of the society and compel him
to produce the same at any place at the head-quarters of the society or any branch thereof.
Under sub-section (4) of the Section 81, duty is cast on every person, who is or has at any
time been an officer or employees of the society and every member or past member of the
society, to furnish such information in regard to the transaction or working of the society,
as the auditor may require.
2. Acts and omissions which constitute offences under the Co-operative Societies Act. -
Section 146 of the Maharashtra Co-operative Societies Act specified a number of actions
and omissions by office-bearers and members of co-operative societies, which constitute
offences and the following section 147, lays down punishment for such offences. Many of
the offences, enumerated in the Section pertain to the duties and responsibilities of the
officers, employees and members of the societies with reference to maintenance of
accounts and audit. Thus, under section 146 (g), refusal by an officer or member of the
society in possession of information to furnish to the auditor, information required by him
or to produce books, papers and other documents and to give assistance to the auditor
constitutes an offence under the Act and under sections 147 (g), is punishable with a fine
which may extend to Rs. Five thousand. Under clause 146(l) of the section, failure to
comply with the requirements of sub-section (4) of section 81, viz., failure to furnish
information in regard to transactions and working of the society, constitutes an offence
and is punishable with a fine, upto Rs. One thousand. Disobedience of summons issued by
the Auditor will also constitute an offence under this sub-section and also under the Indian
Penal Code (Section-174, IPC), since auditors are deemed to be public servants under
Section 161 of M. C. S. Act. The committee of a society or an officer or member thereof
willfully neglecting or refusing to do an act or furnish any information required by the
auditor would also commit an offence under clause (j) of section 146 and under the
corresponding clause (147j) of the following section, can be punished with an
imprisonment for a term not exceeding one month or with a fine upto Rs. Five thousand or
with both. It need hardly be mentioned for purposes of his audit, the auditor has to rely on
the information available from the books and also the clarification and explanation offered
by the officers and members of the society. Under clause (k) of section 146, a committee
of a society or an officer or member thereof, willfully makes a false return or furnishes
false information or fails to maintain proper accounts, commits an offence and under the
same clause of the following section is punishable with imprisonment for a term which
may extend to one year or with a fine upto Rs. Ten thousand or with both. For
disobedience of summons issued by the auditors, cases may also be lodged with
magistrates under the Indian Penal Code. However prosecution under this section shall
not be lodged, except previous sanction of the Registrar.
3. Additional powers. : - 1) The auditor of a co-operative society is deemed to be a public

servant within the meaning of section 20 of the Indian Penal Code. The authority
exercised by him as public servant and also the above mentioned powers, which have been
given to him under provisions of the Co-operative Societies Act, are not available to the
auditor of a joint stock company. The powers of the auditor of a co-operative society, in
particular, the power to summon and compels production of documents and papers from
all persons having custody of books of accounts, cash and property of the society, gives
the auditor power to go beyond the books of the society and by making personal inquiries
17
with the members, creditors and other constituents of the society, he can supplement the
information available from the books and records of the society about the genuineness and
correctness of the entries recorded in the books of accounts of the society.
2) Power to seize records: During the course of audit of any society, if the auditor is
satisfied that the books and records of society are likely to be suppressed, tempered with
or destroyed or the funds and property of the society, are likely to be misappropriated or
misapplied, then he has to report to the Registrar, then the Registrar or the person
authorized by him may apply to Executive Magistrate within whose jurisdiction the
society is functioning for seizing and taking possession of records and property of the
society. The procedure for impounding has been described in section 80 and
corresponding rule 68.
4. Audit Memo to be considered by annual general meeting. - Sub-section (4) of section

75 of the Maharashtra Co-operative Societies Act laid down that at every annual general
meeting of the society, along with the audited balance sheet and profit and loss account
and the committee’s report, the auditor’s report and rectification report of earlier audit
report shall be placed before the members for adoption. Under Rule 30 of the Maharashtra
Co-operative Societies Rules, the audit memo is public document and any member of
society or of the public may inspect it free of cost in the office of the society or the
Registrar and may also obtain copies thereof on payment of the prescribed fee.
5. Auditor’s right to receive notice of and attend annual general meeting. : - Sub-section
(5) of section 81 also gives a right to the auditor to receive all notices and every
communication relating to the annual general meeting to attend such meeting and to be
heard thereat, in respect of any part of the business, with which he is concerned as auditor.
6. Auditor to be a “public servant”: - Section 161 of the Maharashtra Co-operative

Societies Act provides that a person appointed by the Society or Registrar, to audit of the
accounts of a society under section 81 shall be deemed to be a public servants within the
meaning of section 20 of the Indian Penal Code. Rule 2 (B1) defines the auditor as,
“Auditor or auditing firms from panel approved by State Government or Authority
authorized by State Government and appointed by Annual General Meeting or by
Registrar”. Their authorities as public servants adds to their status and afford them
additional facilities, which are not available to the auditors of joint stock companies.
7. Authority of Auditors as public servants. : - Chapter X of the Indian Penal Code deals
with contempt of lawful authority of public servants. Under section 161 of the
Maharashtra Co-operative Societies Act, all auditors of co-operative societies are public
servants, can be invoked by them as defined in section 20 of the Indian Penal Code. As
such, they can invoke the penal provisions contained in this Chapter intended to enforce
obedience to lawful authority of a public servant. Contempt of lawful authority of courts
of justice, police officers and officers of Revenue and other Government Departments and
other persons declared as public servants under various other Acts, are punishable under
this head.
Under sub-section (3) (a) of section 81, the auditor for purposes of his audit has
been empowered to summon and call for proceedings of any book, accounts, documents,
papers, securities, cash and other properties of the society.
Under sub-section (4), any person, who has at time been an officer or employee of
the society and every member and past member of the society, is required to furnish such
18
information in regard to the transactions and working of the society as the auditor may
require.
The auditor has thus not only the power to issue summons, enforce attendance and
require production of documents, but, under sub-section (4) of section 81, he can put
questions and ask for information in regard to any transaction of the society.
8. Consequences of disobedience of summons. - Under section 172 of the Indian Penal

Code, absconding to avoid service of summons, notice or order from any public servant,
legally competent, is an offence. and shall be punished.
Preventing service of summons is an offence under section 173 (IPC).
Non-attendance in obedience to an order from a public servant constitutes an
offence under section 174 of the Indian Penal Code, which reads as under: -
“Whoever, being legally bound to attend in person or by an agent at a certain place and
time in obedience to a summons, notice, order or proclamation proceeding from any public
servant legally competent, as such public servant, to issue the same, intentionally omits to
attend at that place or time, or departs from the place where he is bound to attend before
the time at which it is lawful for him to depart, shall be punished with simple
imprisonment for a term which may extend to one month, or with fine which may extent to
five hundred rupees, or with both.”
9. Failure to produce documents. : - Under section 175 of the Indian Penal Code
omission to produce any document to public servant by person legally bound to produce is
an offence: which reads as under: -
“Whoever being legally bound to produce, or deliver up any document or
electronic record to any public servant as such, intentionally omits to produce or deliver up
the same,” shall be punished.
Auditors of co-operative societies have a right of access to books, records,
statements, documents, etc. of the society in possession of or in the custody of any person
and whoever refuses or fails to produce any document in his possession can be punished
under this Section.
Under section 176 of the Indian Penal Code omission to give notice or information
to public servant by person legally bound to give it, constitutes an offence.
10. Consequences of refusal to answer questions and giving false evidence. - Under
section 177 of the Indian Penal Code furnishing false information as a public servant is an
offence. Which reads as under: -
“Whoever, being legally bound to furnish information on any subject to any public
servant, as such, furnishes, as true, information on the subject which he knows or has
reason to believe to be false, shall be punished with imprisonment and fine.”
Refusing oath or affirmation when duly required by public servant to make it is an
offence under section 178 of the Indian Penal Code. However, the Act does not empower
auditors to examine person’s on oath or affirmation, although under section 81(3) (a)
and 81(4), he can summon members, officers and employees of the society-both past and
present and require them to produce documents in their possession and furnish information
required by him. He can no doubt put questions on any subject relating to his audit and
refusal to answer questions put by him would constitute an offence punishable under
section 179 of the Indian Penal Code.
Under section 179 of the Indian Penal Code refusing to answer public servant
authorized to question is an offence:
19
“Whoever, being legally bound to state the truth on any subject to any public servant,
refuses to answer any question demanded of him touching that subject, by that public
servant in exercise of the legal powers of such public servant commits an offence under
this section and is liable for punishment for 6 months or fine of Rs. 1,000 or both.”
However, under sections 131 and 132 of the Indian Evidence Act, a witness is
exempted from answering certain questions. If a person gives false answers or furnished
false or misleading information to the auditor, then, he will be guilty under section 193 of
the Indian penal Code the relevant portion of which reads as under: -
“…and whoever intentionally gives or fabricates false evidence in any other case (viz.,
other than judicial proceeding) shall be punished with imprisonment of either description
which may extend to three years and shall also be liable to fine.”
Since the Maharashtra Co-operative Societies Act does not give necessary authority to
the auditors, provisions of sections 180 to 181 of the Indian Penal Code will not apply to
statements made before the auditors.
Under section 182 of the Indian Penal Code furnishing false information with
intent to cause public servant to:
(a) to do or omit anything which such public servant ought out to do or omit, if the
true state of fact was known to him or
(b) to use his lawful power to the injury of another person in an offence. It has,
however, to be noted that the auditor has to verify all information and explanation given to
him and should not ordinarily be mislead. Any attempt to mislead him by giving false
information would constitute an offence under the section.
11. Causing abstractness to public servant. : -Under sections 186 and 187 of the Indian
Penal code obstructing a public servant in the discharge of his duties and omission to assist
public servant when bound by law to give assistance are offences. Under section 189 of
the India Penal Code holding out of any threat of injury to a public servant is an offence.
These provisions have to be read with the penal provisions contained in sections 146 of the
Maharashtra Co-operative Societies Act and are intended to assist the auditor in the proper
discharge of his duties.
12. Need of above extra powers. : -These extra powers enumerated above have been given
to the auditor of a Co-operative Society because of the wider field to be covered by him
during his audit. The audit of a co-operative society as we have seen is not expected to be
a mere critical examination of the entries in the books of accounts and comparing them
with the vouchers and other documents, but includes within its purview personal
verification of the members and examination of their pass books. This is necessary
because the members of co-operative societies, particularly in the villages, are simple and
trusting people and are not always anxious to understand the correctness and propriety of
the transactions recorded in their names. Members of societies, particularly members of
agricultural credit societies in the villages, have generally and implicit faith in the honesty
and integrity of the office-bearers and their trusting nature has been found to have been
taken advantage of by unscrupulous persons to further their own ends. The auditor of a co-
operative society is, therefore, required to have personal contact with as many members as
possible so as to make his audit effective and searching in order to ensure that no
undesirable transactions or dealings lie hidden from the surface.
13. Liability of the Auditor: - Nature and extent of liability-The auditor of a joint stock
company is appointed by the share-holders and is, therefore, their agent. As such, he is
liable to them if as a result of his negligence in the performance of his duties loss has been
20
occasioned to the company. Although there are very few decided cases in which the courts
have awarded damages against the auditors, it has been generally accepted that the auditor
would be held liable only where he has failed to apply due skill and care in the
performance of his duties. What is reasonable care and skill would depend upon the
circumstances of each case. However, the courts have always taken a lenient view having
due regard to the nature of the work of the auditor and the meager remuneration paid to
him.
14. Responsibility of the auditor to the Registrar / Society. :- As per section 81 (1) (a)
society has to arrange to get their accounts audited, at least once in each co-operative year
by an auditor from the panel of auditors maintained by the Registrar and approved by
Government. In case society has failed to appoint the auditor within the prescribed time
limit and also failed to submit return under Section 79 (1B) regarding appointment of
auditor and his written consent, then the Registrar has to appoint the auditor. These
auditors are responsible to the member as they are appointed by the society in its meeting.
However, the responsibility for reporting to Registrar / Society is rest on these auditors.
15. Auditor’s responsibility in certifying balance sheet and profit and loss account. : -
The form of the auditor’s report prescribed under Section 81(5B) and Rule 69 (3) of the
Maharashtra Co-operative Societies Rules, broadly requires him not only to certify that the
profit and loss account and the balance sheet are not only in agreement with the books of
accounts, but also that they give a true and fair view of the state of affairs of the business
as at the close of the year and of its earnings for the year. It is, therefore, necessary that the
auditor should carry out a careful and exhaustive scrutiny of the accounts to satisfy
himself that the whole of the transactions have been properly recorded in the books and
that the balance sheet and profit and loss account do show a true and fair view of the state
of affairs of the business and its profits. He has further to make careful enquiries and
verify the physical existence of the securities and other properties shown in the balance
sheet and also to see that all liabilities have been brought into account. He has further to
ensure that all statutory requirements have been complied with and that the financial
statements have been prepared in accordance with the generally accepted accounting
policies and accounting standards issued by ICAI / Government and adopted by the
society.
15-A. Opinion from an expert (SA 620) :- The auditor has sole responsibility for the
audit opinion expressed and that responsibility is not reduced by auditor’s use of work of
an expert. If the expertise in field other accounting and auditing is necessary to obtain
sufficient, appropriate audit evidence, auditor shall determine whether to use the work of
an expert. Auditor shall evaluate whether expert has necessary competence, capabilities
and objectivity for audit purpose.
16. Need to carry out further probe when necessary. : -The auditor is required to satisfy
himself about the propriety, genuineness and correctness of the transactions entered in
the books. For this purpose, he has to rely on the vouchers and other documents presented
to him by the management and the information and explanations furnished to him. If in the
course of his investigation, he comes across anything, which arouses his suspicion, he
should probe it to the bottom. But, in the absence of any suspicious circumstances, he is
expected to exercise more than ordinary care and diligence and he is entitled to believe in
the honesty and integrity of the office bearers and servants of the business. However,
unless he is thoroughly satisfied, he should not certify the correctness of the accounts.
21
Where the auditor is not completely satisfied as to correctness of the accounts or the
manner of their presentation, or when his requirements are not complied with, he should
not hesitate to qualify his report by specifying the points on which he is not satisfied or in
respect of which his requirements have not been complied with. Qualifications, which may
be considered while reporting, are explained elsewhere.
17. Responsibility for detection of frauds. - With his expert knowledge of accounts,
finance and law and with his right of access to all books of accounts, vouchers and other
documents and his right to call for any information or explanation from the management,
he should be able to detect the existence of any fraud or serious error. He is required to
exercise reasonable care, skill and vigilance in the performance of his duties. However,
he cannot be held liable for not tracing out ingenious and carefully laid out schemes of
fraud in the absence of any circumstances which should have aroused his suspicions,
particularly when such frauds have been perpetrated by tried and trusted employees or
those holding positions of trust and responsibility.
As per amended clause (e) of Sub-section 1 of the section 81, auditor has to report
the modus operandi, amount involved, persons involved, in case of financial irregularities
and misappropriation or embezzlement of funds or fraud, for which he requires to
investigate the records and accounts and relevant records maintained by the others, who
are also involved in.
Bearing in mind the above special points relating to audit of co-operative societies,
the liability of the auditor for specific acts of commission and omission may be dealt with
under the two broad headings-criminal liability and civil liability.
18. Criminal liability of auditors- An auditor of a company who certifies a balance sheet,
profit and loss account or any other statement, knowing it to be false runs the risk of being
held criminally liable under section 628 of the Indian Companies Act. There is no such
provision in the Co-operative Societies Act and the auditor of a co-operative society can
be held criminally liable, only if any of his acts constitute an offence under the Indian
Penal Code, which is quite a comprehensive piece of legislation. Thus, the auditor of a
co-operative society can be hauled up before a Criminal Court, if he has certified a
balance sheet or singed any other statement knowing it to be false.
19. Civil liability of auditors – As regards civil liability of auditors, there have been many
cases in which the auditor has been sued for damages. From the comments made by the
judges, while discussing the duties and liability of auditors, the following conclusions may
be arrived at, which will serve as useful guidance to auditors of co-operative societies.
An auditor certifying the profit and the balance sheet does not merely guarantee the
arithmetical accuracy of the statements, but express his opinion that these statements do
display true and fair view of the financial position of the business and its earnings.
20. Auditor must apply due skill and care: - He must apply due skill and care and
ascertain that the books of accounts contain a true and correct record of the transactions
(Armitage vs. Brewer and Knot, 1932). He has to be satisfied that the specific
requirements of the Act, the rules and byelaws have been duly complied with. He cannot
excuse himself that he was not aware of these provisions. He must be honest, that is, he
must not certify what he dose not believe to be true and he must take reasonable care
and apply due skill, before he believes that what he certifies is true. What is reasonable
care and skill depends upon the circumstances of each case. Where there in nothing to
excite suspicion, very little inquiry will be reasonably sufficient. Where his suspicions are
22
aroused, he must probe the matter to the bottom. (London and general bank case, 1895).
Since he is not supposed to have an expert knowledge of technical matters, he is entitled to
rely upon the statements and opinions of officials and other experts on technical matters.
Although he is not a valuer, he has to satisfy himself that the various assets have been
valued on a fair and reasonable basis and he can rely on the valuation certificates
furnished by the management only after making due enquiries and after applying
necessary tests, that all the properties, securities and other assets shown in the balance
sheet were in existence on the date of the balance sheet and that they had been properly
valued. Omission to count the cash on hand and carry out necessary inspection of the
securities constitutes negligence. (London oil storage case, 1904 and red.) (The City
Equitable Life Insurance Co., Ltd., 1924).
He has also to see that all liabilities incurred, particularly in respect of purchases
made and expenses incurred, are duly brought into account and are not understated. (Irish
woolen co., ltd., 1904).
21. Auditor’s duty in regard to stock in trade and book debts. –In regard to stock in trade,
although it has been held that it is no part on the auditors duty to take stock or as a value
(Kingston Cotton Mill’s Case, 1896), he has to be satisfied not only about the
arrangement made for stock taking, but also about the correctness of the valuation by
tasting a few of the stock sheets. In case of banks and other credit institutions, he should
examine all the book debts and ascertain whether the provision made for bad and doubtful
debts is adequate. (Arthur Green and co., vs. central and discount corporation ltd. 1920).
22. Liability for damages. - An auditor undertakes considerable responsibilities in that, the
statements certified by him, are relied upon not only by the share holders, but also by the
creditors, tax collectors and the general public, as representing an accurate picture of the
concern, whose accounts he has audited. He has, therefore, to be extremely careful in the
discharge of his duties, as if, by the neglect of his duties or due to his failure to apply due
skill and care, loss has been occasioned to the institution, he can be held liable for
damages where damages has resulted from any mistaken of facts in the balance sheet or
any other statement or report submitted by the auditor, the onus to prove that it is not the
result of any negligence or breach of duty on his part lies on the auditor. (Republic of
Bolivia Exploration syndicate Ltd.(1914) 1 Ch.139; XLIX The Accountant L.R.61)
23. Responsibility for work done by clerk. - An auditor cannot escape personal liability by
saying that the work was done by his clerk. It has been held that except where judgment
and discretion come in, the skill of the clerk must be the same as the skill of the principal.
(Henry Squire Cash Chemists vs. Ball Baker and co., 1911 and mead vs. Ball Baker Co.
1911). The principal must not excuse himself for his clerk’s negligence by saying that he
employed a clerk.
24. Extend of detailed scrutiny and enquiry. - The extent of detailed scrutiny of the
accounts and the documents and the information and explanations to be obtained are of
course the discretion of the auditor. However, he cannot escape liability on the plea that he
did not check the particular portion of the work or that he did not ask for an explanation or
obtain information on a particular point.
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CHAPTER II
II-1 ARRANGEMENTS FOR AUDIT
1. Statutory responsibility of Registrar / Society for annual audit of co-operative

societies. – Under Section 81 of the Maharashtra Co-operative Societies Act, 1960, audit
of all Co-operative Societies once in a year is the statutory responsibility of the Registrar/
of the Society. The society has to submit the return of appointment of auditor as provided
by subsection 2A of the section 75, within thirty days from the date of Annual General
Meeting. If the society fails to submit return to the Registrar. If the Registrar is satisfied
about non appointment of the auditor by the society, Registrar may cause to appoint the
auditor to that society as provided in the Section 81 of the Act.
2. Audit of Co-operative Societies by Auditors appointed by the Registrar / Society - The

Maharashtra Co-operative Societies Act, 1960, provides for the appointment of auditor by
the society, in case, if the society fails to appoint the auditor within specified time limit in
the Act and Registrar is satisfied about this, then only the Registrar can appoint the auditor
from the panel of auditors approved by the Government and prepared by the Registrar.
The Registrar shall have to appoint the auditor possessing the required qualification and
experience as provided under explanation given in section 81 of the Act. The (a) to (d)
clauses of the explanation states, qualification of the chartered Accountant, firms of
chartered accountant, certified auditors and Government auditors to whom the Registrar
can allot the audit by order thereof. The (a) to (d) clauses specifies the experience and
qualification as under :-
Sr.No. Details of auditors Qualification Experience
Firm of more than one
Chartered Accountant
A chartered accountant within the Nil
Firm
meaning of CA Act 1949
Individual chartered At least 1 year in audit
Individual Chartered
B accountant within the meaning of Co-operative
Accountant
of CA Act 1949 Society
Holding degree from At least 3 years in
C Certified Auditor recognized university and audit of Co-operative
completed G.D.C.& A. Society
Government Satisfactory
H.D.C. or G.D.C.& A. or
D (Departmental) completion of
D.C.A.
Auditor probationary period.
In addition to above Sr.No. A, B and C requires knowledge of audit of co-operative

society and Marathi language and Sr.No. D requires knowledge of Marathi language.
3. Preparation of Panel of auditor :- The panel of auditors is prepared by the Registrar

as per the procedure prescribed in Rule 69 (read with Section 81) as under : -
Rule no.69 (f) :-
(i) the Registrar shall call applications before the specified date as declared in the notice
for empanelment from eligible auditors and auditing firms by a public notice to be
displayed on the official website of the State Government and in any other mode, if
required. Such notice shall also be published on the notice board of the office of the
Registrar and District Deputy Registrars.
24
(ii) Every applicant shall submit only one application to the office of the concerned
District Deputy Registrar of the District, where he ordinarily resides.
(iii) Applications received shall be scrutinized by the Committee presided over by the
District Deputy Registrar consisting of the District Special Auditor of the District,
representative of the Chartered Accountants of the District, representative of the Certified
Auditors of the District as members and the Assistant Registrar
(Administration) of the District shall function as Member Secretary of the said committee.
(iv) After scrutiny, the District Deputy Registrar shall submit list of eligible applicants to
the Registrar alongwith their applications and documents. The Registrar may scrutinize the
applications recommended by the District Committee.
(v) Any aggrieved applicant may approach to the Grievance Redressal Committee headed
by the Divisional Joint Registrar, Divisional Joint Registrar (Audit), as member and
Divisional Deputy Registrar of the Division shall function as Member Secretary of the said
Committee and the decision of the Committee shall be final.
(vi) The Registrar shall cause to display a approved list of auditors and auditing firms
panel on the official website of the Government.
(vii) the Registrar shall classify the societies and auditors for the purpose of audit in the
following manner, namely :—
Classification of Auditors and Societies
[under section 81 and Rule 69 (1) (f) (vii)]
TABLE – A
Description of
Class Societies to be Audited
Auditors
(1) (2) (3)
A 1) Chartered (1) Maharahstra State Co-operative Bank *
Accountant Firm (2) District Central Co-operative Bank
2) Chartered (3) Urban Co-operative Banks having Deposits more than
Accountant having Rs. 25 Crores.
at least 5 years (4) Salary Earners Co-op. Banks
experience in audit (5) Maharashtra State Co-operative Marketing Federation *
of co-operative (6) Maharashtra State Co-operative Cotton Grover's
Societies. Federation.*
3) Joint Registrar (7) Maharashtra Rajya Dudh Sangh (Mahananda) *
(Audit) and Special (8) Maharashtra State Co-operative Agriculture and Rural
Auditor Class-I who Multipurpose Development Bank
was completed (9) Maharashtra State Co-operative Housing Finance
probation period Corporation.
successfully. (10) Maharashtra State Tribal Development Corporation
(11) Maharashtra Rajya Sahakari Sangh and Divisional Co-
operative Board.
(12) Maharashtra State Co-operative Fisheries Federation
(13) Maharashtra State Co-operative Consumer Federation
(14) Maharashtra State Co-operative Spinning Mill
Federation.
(15 Maharashtra State Co-operative Power loom Federation
(16) Maharashtra State Co-operative Textile Federation
(17) Maharashtra State Co-operative Handloom Federation
(18) Maharashtra State Co-operative Cotton Grovers
Processing Societies.
(19) Maharashtra State Co-operative Labour Societies
25
Federation.
(20) Maharashtra State Co-operative Bank Association
(21) Maharashtra State Co-operative Credit Societies
Federation.
(22) Maharashtra State Co-operative Jungal Kamgar
Federation.
(23) Maharashtra State Co-operative Sugar Factories
Federation.
(24) Maharashtra State Co-operative Sugar Industries
Development Societies.
(25) Maharashtra State Co-op. Cadre Federation and
District Coop Cadre Board.
(26) Maharashtra State Co-op. Industrial Societies
Federation.
(27) Other National and State level Co-op. Federation not
mentioning above.
(28) Co-operative Spinning Mill/ Weaving Mills
(29) Co-operative Sugar Factories
(30) District Co-operative Milk Union
(31) District Co-operative Agriculture and Rural
Multipurpose Development Bank.
(32) Any other society specified by Registrar from time to
time.
* Note : Societies at Sr. Nos. 1, 5, 6 and 7 shall be audited only by Chartered Accountant
Firm or a Chartered Accountant or Joint Registrar (Audit) categorized in 'A' Class.
Auditors categorized in ‘B’ Class and 'C' Class are not eligible to audit societies
categorized under Table – A. In case of Co-operative Bank, the Government Auditor may
conduct re-audit, test-audit or special audit only.
TABLE - B
Description of
Auditors
(1) (2) (3)
B 1) Chartered (1)Urban Co-operative Bank having deposits up to Rs. 25
Accountant having Crores.
at least one year (2) Urban Co-operative Credit Society and Rural
experience in audit nonagricultural credit society having deposit 10 crores and
of Co-operative above.
Societies. (3) Salary earners Co-operative Credit Society having
2) Special Auditor working capital 10 crores and above.
Class – 2, Auditor (4) Co-operative Starch Factories
Grade - I who was (5) Co-operative Industrial estates.
completed probation (6) District Co-operative Labour Federation
period successfully. (7) Sales and Purchase Co-operative Unions (District and
3) Certified Auditor Taluka).
having at least 10 (8) Housing societies having 100 and more members
years experience in (9) Co-operative Jinning and Pressing Societies /Rice Mills
audit of Co- and Oil Mills.
operative Societies. (10) Primary Co-operative Dairy Societies having turnover
above Rs. 50 lacs.
26
(11) Primary Co-operative Poultry and piggery and

livestock Societies having turnover above Rs. 25 lacs.
(12) Primary Co-operative Fisheries Societies having
turnover above Rs. 50 lacs.
(13) District / Central Weavers Co-op. Societies.
(14) District and Central Co-op. Consumers stores
(15) Co-operative Hospital
(16) Mula Pravara Electric Society and Other Elec.
Societies.
(17) District Co-operative Board
(18) District Housing Federation
(19) Other District Federal Societies not mentioned above
time.
* Note : Societies at Sr. Nos. 1 and 2 shall be audited only by a Chartered Accountant and
Special Auditor Class- II Categorized in 'B' Class. Auditors categorized in 'A' Class above
are also eligible to audit societies categorized under Table - B. Auditors categorized in 'C'
Class are not eligible to audit societies categorized under Table – B.
TABLE - C
Description of
Auditors
(1) (2) (3)
C 1) Certified Auditor (1) Primary Agricultural and Co-operative Credit Societies
having at least 3 (PACS) and Primary Krushak and Adiwasi Seva / Grain
years experience in Bank.
audit of Co- (2) Urban Co-operative Credit Societies and Rural
operative Societies. nonagricultural credit societies having deposits less than
2) Auditor Grade – 2 Rs. 10 crores.
and Sub – Auditor (3) Salary earners societies having working capital less than
who was completed Rs.10 crores.
probation period (4) Primary Co-operative Dairy Societies having turnover
successfully. less than Rs. 50 lacs.
(5) Primary Co-operative Poultry, Piggery and Livestock
Societies having turn over less than Rs. 25 lacs.
(6) Primary Co-operative Fisheries Societies having
turnover less than Rs. 50 lacs.
(7) Sugarcane supply cooperative societies / Transport
Coop. societies.
(8) All Farming Co-operative Societies
(9) Housing societies having less than 100 members
(10) Lift irrigation societies
(11) Labour contract societies
(12) Forest Labour Co-operative Societies
(13) All types of Primary Marketing Societies and Food
Processing Societies.
(14) Primary Weavers Co-op. Societies (Handloom and
Powerloom).
(15) Primary Industrial Co-op. Societies.
(16) BLVA societies
27
(17) Primary consumers Co-operative Societies.

(18) Social service societies and unemployed youth co-
operative Societies.
(19) Taluka supervisory unions.
time.
* Note : Auditors categorized in 'A' Class and ‘B’ Class above are also eligible to audit
societies categorized under Table - 'C'.
4. Removal of auditor from panel :- Rule 69 (g) provides criteria for removal of
auditor and auditing firm from the panel shall be as follows :-
(g) The criteria for removal of the name of auditor and auditing firms from the panel shall
be as follows, namely :—
(i) non-submission of audit report as specified in sub-section (5B) of section 81, to the
society and the Registrar within the period of one month from the date of completion and
in any case before the issuance of notice of the general body meeting ;
(ii) not-disclosure the true and correct picture of accounts as specified in clause (c) of sub-
section (3) of section 81 ;
(iii) after giving consent for audit by the auditor or auditing firm and after issuance of
order of appointment of auditor or auditing firm, audit is not completed within stipulated
period as specified in sub-section (1) of section 81 ;
(iv) non-submission of specific report stating that, any person is guilty of any offence
relating to the accounts or any other offences within a period of fifteen days from the date
of submission of audit report to the society and the Registrar ;
(v) failure to file special report to the Registrar if any ;
(vi) failure to file the First Information Report, if required thereof;
(vii) non-submission of scrutiny of audit rectification report within six months to the
society ;
(viii) if in the test audit or re-audit of the society it is found that, the auditor or auditing
firm is responsible for any commissions and omissions ;
(ix) if the auditor is borrower of the society and has conducted the audit of the same
society without disclosing the said fact to the society ;
(x) if the auditor or his family member is employee or ex-employee of the concerned Co-
operative society ;
(xi) if the auditor is an auditor or a partner of an auditing firm which is also conducting
internal or concurrent audit of concerned Co-operative society ;
(xii) if the auditor or his family member, as specified under explanation (I) of sub-section
(2) of section 75 of the Act, is committee member of the concerned co-operative society ;
(xiii) if the auditor has conducted audit, without appointment order issued by the society
with the prior approval of general body or the Registrar, if any, as the case may be ;
(xiv) if the auditor is family member of a employee of the department of co-operation:”
II-2 SCOPE OF AUDIT
1. Scope of Audit: The audit of cooperative societies is required to be done as per the
provisions contained in the Section 81 and rule 69 of the Maharashtra Co-operative
Societies Act and rules made there under. Specific provisions are made under section
81(2), regarding the items that are to be audited by the auditors, details of which are
explained elsewhere in the manual. Apart from these items the auditors have to audit as
per objects defined, in auditing practices or general customs, which includes the detection
28
of errors and frauds. The nature of cooperative societies is different from the Joint Stock
Companies and other body corporate, regarding the principle on which they run.
Cooperative societies are run on cooperative principles i.e. for the benefit of their
members. The Commissioner for Cooperation and Registrar of Cooperative Societies has
issued various circulars, in regards, to the various items that are to be checked by the
auditors of Cooperative Societies. The Institute of Chartered Accountants of India has
issued various guidelines on audit, Accounting Policies and standards, auditing practices
for the guidance of the Chartered Accountants, which are necessary to include in the scope
of audit, as the auditing standards are also included in the Section 81(2) of the Act, in the
present scenario as a basis for the audit. The accounting standards that are applicable to
the cooperative societies are listed elsewhere in the manual. The Standards on auditing
(SA) issued by the institute are given below are applicable to the Cooperative Societies.
Sr. Auditing
Name of Auditing Standard
No. Standard No.
1 200 Overall Objectives of the Independent Auditor
2 210 Agreeing the terms of Audit Engagements
3 220 Quality control – an audit of financial statements
4 230 Audit documentation
5 240 The Auditors responsibilities relating to Fraud
6 250 Consideration of Laws and Regulations in an Audit
7 260 Communication with those charged with Governance
8 265 Communicating Deficiencies in Internal Control
9 299 Responsibility of Joint Auditors
10 300 Planning an Audit of Financial statements
11 315 Identifying and Assessing the risks of Material Misstatement
12 320 Materiality in Planning and Performing an Audit
13 330 The Auditors responses to Assessed Risks
Audit considerations relating to an entity using a service
14 402
organization
15 450 Evaluation of Misstatements identified during the Audit
16 500 Audit Evidence
17 501 Audit Evidence – Specific considerations for selected
18 505 External confirmations
19 510 Initial Audit engagements – Opening balances
20 520 Analytical procedures
21 530 Audit Sampling
22 540 Auditing accounting estimates
23 550 Related Parties
24 560 Subsequent Events
25 570 Going concern
26 580 Written Representations
27 600 Using the work of another Auditor
28 610 Using the work of Internal Auditors
29 620 Using the work of an Auditors Expert
30 700 Forming an opinion and Reporting financial statements
31 705 Modifications to opinion in the Independent Auditors
32 706 Emphasis of matter para and Other matter paragraph
33 710 Comparative information – Corresponding Figures
34 720 The Auditors responsibility in relation to other information
29
35 800 Audits of Financial Statements prepared in accordance

36 805 Special considerations – Audits of single financial statements
37 810 Engagements to report on Summary Financial Statements
Scope of audit accordingly rests on the provisions contained in the section 81(2)
and Rule 69 of the Act, Objectives of audit, principle governing the cooperative societies
and circulars issued in this regards by the Registrar.
2. The auditors while getting appointments from the societies should obtain a copy of
resolution passed in the Annual General meeting in which his appointment was made. The
resolution should clearly mention the period of audit. The auditor should carry out the
audit as per the provisions of Section 81 read with Rule 69 and any other directions as may
be specified by the Registrar from time to time.
3. Submission of Audit Report :- Sub-Rule (b) of Rule 69 (1) prescribe the procedure of
submission of audit report by the auditor as :- “the auditor has to complete his audit within
4 months from the close of financial year and the report, also in compact disk shall be
submitted to the society and the Registrar, as specified in Sub-Section (5B) of Section 81
of the Act, and also Part – A of audit report, Audit Certificate and audited financial
statements shall be uploaded by the auditor on official website of Co-operation
Department.”
4.Opinion by the Auditor :- The auditor has to express his opinion about the true and fair
position of the financial statement as per Section 81(5B) of the Maharashtra Co-operative
Societies Act. 1960. As per Rule no. 69 (3) The auditor shall submit in respect of Co-
operative Banks in Form N-1 and in other cases in Form N-2 an audit memorandum to the
society and to the Registrar with regards to the accounts, balance sheet and profit and loss
accounts or statement of income and expenditure examined by him as on the date and for
the period up to which the accounts have been audited, and shall state whether in his
opinion and to the best of his information, and according to the explanation given to him,
accounting policies adopted by the society as per accounting standards laid down by the
State Government or the Institute of Chartered Accountants of India as the case may be,
the said accounts give all the information required by the Act in the manner so required
and give true and fair view,—
(i) in the case of the balance sheet, the state of society’s affairs as at the end of the
financial year or any other subsequent date up to which the accounts are made up and
examined by him, and
(ii) in the case of the profit and loss account of the profit or loss for the financial year or
the period covered by the audit, as the case may be. While certifying the profit or loss of
the society, Auditor shall quantify the effect of shortfall in various provisions, like Non
Performing Assets, overdue interest, depreciation and any other provisions relating to
expenses over profit or loss and state clearly that, after considering effect of all provisions,
whether there is profit or loss to the society.”
Rule 69 (4) further provides that the audit memorandum shall state; -
(i) whether the Auditor had obtained all the information and explanations which to the best
of his knowledge and belief were necessary for the purpose of his audit;
(ii) whether in his opinion proper books of accounts, as required by the Act, the rules and
the bye-laws of the society have been kept by the society so far as it appears from the
examination of these books;
30
(iii) whether the balance sheet and profit and loss account examined by him are in
agreement with the books of accounts and returns of the society and give true and fair
view of state of affairs and
(iv) whether the accounting standards adopted by the society are consistent with, those laid
down by the State Government or the Institute of Chartered Accountant of India and have
no adverse effect on the account at finance year status of the society.
5. Qualification to opinion: The auditor is required to state in audit memorandum reasons

for the negative answers or qualifications as mentioned in sub rule (4) above. Auditor has
to express his negative / adverse qualification on financial statement as per sub rule 5 in
his audit report. In this regard, the Institute (ICAI) has issued standard on auditing 700
which the auditor should follow while expressing his opinion on financial statement and
record the reasons for his qualification.
6. Appointment letter by society :- As per Section 81, the auditor has to be appointed
by the society in its Annual General Body Meeting and require to issue appointment letter
to the auditor and also submit a return under Section 79 (1B). This appointment letter must
contain the objective and scope of audit, responsibilities of the auditor, responsibility of
the management.
The appointment letter of the auditor broadly should contain the following matters:
1) Role of the auditor as per Section 81 read with Rule 69.
2) Audit expectations having regard to Cooperative Societies Act, Rules and byelaws of
the Society concern.
3) Duration of audit, and scheduling of time, audit program in a brief manner.
4) Auditor’s remuneration, reimbursement of out of pocket expenses as per notification
issued by the Government.
5) Reporting method and submission of audit report.
6) Duties after completion of audit, like Special Report, rectification report, and
compliance.
As the Cooperative auditor have been given more responsibilities and powers
under the Cooperative Act, the auditor appointed by the society is expected to audit in
adherence with Cooperative Societies Act, Rules, and byelaws of the Society concern.
7. General Terms and conditions of appointments of Auditors: whether the appointment

of auditor is made by the Registrar or Society, the appointment shall be subject to
following terms and conditions. However, the Society appointing auditor can lay down
some extra conditions regarding scope of audit.
1) The auditor must be from the panel approved by the Government and prepared by the
Registrar.
2) The auditor should not possess any conditions of disqualification.
3) He shall not audit the society, without obtaining the appointment order, and complete
the audit within four months from close of financial year. The auditor should submit his
report within a month from its completion but in any case before the issue of the notice of
the Annual General meeting of the Society.
4) The audit fee should be as prescribed and notified by the State Government.
5) The audit report by the auditor should be in accordance with the instructions issued by
the Registrar and provisions containing Rule 69 (1) (b) in three parts viz. part A- serious
points and frauds, Part-B General remarks as specified in circular, Part-C miscellaneous
objections. The audit report shall also contain the questionnaire specified to various
societies, and schedules as per Rule 69, in the formats prescribed by the Registrar.
31
6) The Auditors have to follow the other terms and conditions that are laid down in the
appointment orders issued by the Registrar or society.
7) The auditor has to submit the information regarding audit of any society, allotted to
him, to the Registrar, as required by him time to time.
8) The auditor should ascertain about its Registration in the panel maintained by the
Registrar, while auditing the society, and specify his panel registration number in the
correspondence regarding audit.
9) Auditor should also follow the provisions of other Acts, if any, applicable to the audit
of concern society. viz. in case of Urban Banks – Banking Regulation Act. Etc.
10) The auditor has to verify the audit rectification report submitted by the society and
offer remarks about compliance of pointes he has raised, for the year for which he has
audited that society; and submit it to the respective Registrar within the area until last
query is complied.
11) The auditor has to submit Special Report/ Specific Report as required by the Act, to
the Registrar, if he come across with the misutilization of fund by management of society;
any fraud or misappropriation in the accounts of the society, by any person responsible
with the records and funds and assets of the society. If the auditor observe serious
irregularities which have material effect on the working of the society, then he has to
submit specific report for further action. In case of misappropriations and frauds he has to
lodge the police case (FIR) against the accused persons with the permission of concerned
Registrar. In case, the auditor has failed in complying his duty in these regards, he will be
liable for action as per provision of Act and Rules, and in case of Government auditor, as
per Service Rules of the Government.
8. Duties of the Auditor :- The auditor’s duty shall be as per provisions Maharashtra Co-
operative Societies Act and Rules and conditions laid down in the appointment letter by
the Registrar or Society.
9. Powers of Auditor : Auditors auditing from the panel of auditors, prepared by the
Registrar have the following powers as per Maharashtra Cooperative Societies Act 1960,
and rules 1961.
1) He shall have a access to all books, accounts, documents, papers, securities, cash
and other properties belonging to, or in the custody of the society, and may summon any
person in possession or responsible for the custody of any such books, accounts,
documents, papers, securities, cash or other properties, to produce the same at any place at
the headquarters of the society or any branch thereof, at all time, but only for the purpose
of his audit.
2) He shall have a authority to obtain such information in regard to the transactions
and working of the society for his audit purposes, from an officer or employee or former
employee of the society, and every member and past member of the society, as per section
81 (4) of the Act.
3) He shall have a right to receive all notices and every communication relating to the
annual general meeting of the society and to attend such meeting and to be heard thereat,
in respect of any part of the business with he is concerned as auditor.
4) Under section 5 (a) of the Act, he shall have a power to impound the books of
society, if he is satisfied during the course of audit that, some books of accounts or other
documents contain any incriminatory evidence against past or present officer or employee
of the society; however he has to obtain previous permission from the Registrar, before he
impound the concern record of the society, of which he takes audit. After impounding the
books or documents he has to give a receipt thereof to the society.
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10 Responsibilities of the Auditor :-

1) The auditor should audit the societies with due skill, care, and observing
professional ethics, integrity.
2) He shall have to bring to the notice of the Registrar and the Society, misutilisation
of funds, misappropriations and frauds that are come across during the course of audit, and
take appropriate action against the persons responsible for the same.
3) The Civil and criminal liability will be rest on him, against the negligence of duty,
if it is found in the audit of society, which he is auditing.
4) Gross negligence will held him responsible to remove from the panel of Auditors
maintained by the Registrar, and action from the Indian Institute of Chartered accountant
of India, as per Chartered Accounts Act, 1949. However he will be allowed to make
representation before the appropriate authority. In respect of certified auditors and
Government auditors the action for this will be decided by the Registrar as per circulars
issued from time to time.
11. Remuneration of Auditor : - Remuneration of auditor shall be at the rates as

prescribed under Rule 74, which reads as :-
(1) Remuneration of the auditor or auditing firm who has conducted audit of a society
shall be borne by the society and shall be at such rates as may be notified by the State
Government from time to time depending upon the class of societies and their financial
parameters.
(2) When auditor or auditing firm is appointed by the Registrar on his own,
remuneration of auditor or auditing firm shall be at rates as per sub-rule (1) above.
(3) If the Registrar, orders re-audit of a society after recording reasons thereof, shall
specify remuneration payable to such auditors as per sub-rule (1) above.
(4) When re-audit is requisitioned by society or any member of society, the
remuneration of auditor or auditing firm shall be as per sub-rule (1) above :
This rule further provides that, when such re-audit is requisitioned by the society or
any member of the society, the remuneration of auditor or auditing firm shall be deposited
by such society or member, as the case may be, with the Registrar prior to commencement
of such audit :
It also further provides that, if it is found in the re-audit, that the appointed auditor
has not conducted audit as per the auditing standards and norms as notified from time to
time and if it is proved that he is negligent in performing audit of the society and he has
not detected fraud, misutilisation of funds, inadequate provisioning, resulting into loss or
profit to the society, then audit fees shall be recoverable as per sub-section (1) of section
156 of the Act, from the said auditor who had conducted the audit and same shall be
refundable, to the society and remuneration of re-audit shall be refundable to the society or
any member demanding re-audit. The said auditor shall also be subject to action under sub
clause (viii) of clause (g) of sub - rule (1) of rule 69 :
This rule also provides that, nothing in the preceding proviso shall apply to the
Government Auditors.
(5) When cost or performance audit of any society is ordered by the State Government
as per the provision of sub-section (2A) of section 81, the remuneration of auditor or
auditing firm shall be notified by the State Government and the amount shall be deposited
by the society with the Registrar prior to the commencement of such audit by him.
(6) For the audit of the society which is under liquidation or the society on which
official assignee is appointed, under the provisions of the Act, the remuneration of auditor
or auditing firm to conduct audit of such society shall be specified by the Registrar.”
33
II-3 DIFFERENT TYPES OF AUDITS
1. Annual audit or statutory audit. - A “periodical” or “annual” audit is generally taken

after the close of the year, when the books have been closed and the balance sheet and the
profit and loss account are drawn up. This type of audit is compulsory in case of
companies registered under the Companies Act, Co-operative societies Act, trusts,
societies and other corporate bodies and associations registered under various Acts. It is
required to be carried out by auditors possessing the prescribed qualifications. The
auditors are required to submit their reports in the prescribed form. Such type of audit,
which is compulsory under law, is known as “statutory audit” and is generally carried
out once a year. Annual audit is taken up and completed as per provisions of Act.
Explanation to Rule 69 (1) (a) specifies types of audit, which includes Annual
audit, Test audit, Cost audit or Performance audit, Special audit and Re-audit.
2. Interim Audit. - An “Interim audit” is at times conducted before the completion of the
final audit, which facilitates its early completion. As co-operative societies, joint stock
companies and other corporate bodies are required to hold the annual general meetings of
their members within the time laid down in their respective statutes, an interim audit
carried out during the course of the year facilitates early completion of the final audit so
that the managing bodies of these institutions are enabled to hold the annual general
meetings of the members within the prescribed time and present audited statements of
accounts to the members. An interim audit of an audit stock company also enables its
directors to declare an “interim dividend” on the basis of profits actually earned. An
interim audit also helps the staff of the society to rectify irregularities pointed out in the
interim audit report and avoids their recurrence. The management is also enabled to revise
its decisions and take other remedial measures in the light of the suggestions contained in
the interim audit report.
3. Internal Audit. - Regarding ‘internal audit’, it can be said that most of the bigger
organizations find it necessary to set up an “Internal Audit Department” headed by the
Chief Internal Auditor, who works under the direct control of the Board and is not
subordinate to the Chief Accountant. The internal auditors submit their reports to the
Board and suggest improvements. Since the Internal Auditor to go into too many details if
he is satisfied that the Internal Auditor works independently of the Accounts Department
and has been carrying on his duties efficiently with due regard to the requirements of
statutory audit. The annual or statutory audit can therefore, be completed early. However,
the cost involved in setting up an Internal Audit Department is considerable and very few
Co-operative Societies can afford to set up and maintain in internal audit Department
functioning independently of the Accounts Department.
4. Pre-audit. -The term “Pre-audit” denotes proper scrutiny of the claims before payments
are made. It is a system under which all vouchers are scrutinized and passed for payment
before actual payment is made. This is ordinarily the duty of the Accountant. But,
sometimes, independent auditors usually designated as financial advisers, are appointed
for the purpose. Such a system is found more suitable in Government Departments and
public undertakings. Pre-audits, however, should not be confused with audit proper, which
is an independent review of transactions as recorded in the books.
5. Re-audit. - Section 81(6) of the Maharashtra Co-operative Societies Act provides that,
“if it appears to the Registrar, on an application by society or otherwise, it is necessary or
34
expedient to re-audit, Registrar may by order provide for such re-audit.” If, during Re-
audit would also be ordered if certain facts of which the auditor was unaware at the time of
his audit have subsequently come to light, which materially affect the correctness of the
accounts. If re-audits are ordered at are requests of the societies or their members or
outsiders, the cost of such re-audits will have to be borne by them as per Rule 74. Where
re-audit is being ordered on the resolutions passed by the general meeting of the society,
before ordering re-audit, reasons for re-audit should be ascertained and examined in detail
and it should be considered as to whether it is necessary to order re-audit. Mere resolution
of the society should not be considered as sufficient reason for ordering re-audit. Since all
the provisions applicable to the original audit are also applicable to re-audit ordered by the
Registrar under Section 81(6), the auditor appointed to carry out the re-audit will have all
the powers of the Registrar under Section 81.
6. Test audit under section 81(3)(c) :- The section 81 (3) (c) Provides, “ If it is brought to
the notice of the Registrar that, the audit report submitted by the auditor does not disclose
the true and correct picture of the account, the Registrar or the authorized person may
carry out or cause to be carried out a test audit of the accounts of such society. The test
audit shall include the examination of such items as may be prescribed and specified by
the Registrar in his order.” This thus means that the test audit is limited to the items that
are prescribed in the order itself. This is not on the demand of the society or members of
the society. But the Registrar can order it suo-moto. The test auditor has not been given
any power like to summon, or otherwise by the Act. He has to submit his report to the
Registrar.
7. Special audit :-
The Act prescribes for Special audit under Section 81(7) for the Co-operative bank,
if requested by the Reserve Bank of India shall be conducted and report thereof shall be
submitted to the Reserve Bank of India and the Registrar. Thus, it clearly means the
Special audit is applicable only on the request of Reserve Bank of India.
8. Cost Audit and Performance audit: The Cost audit of certain types of societies shall
be directed by the State Government under section 81 (2A) of the Act. The section read as
follows:
“ Where in the opinion of the State Government, it is necessary in the interest of society to
do so in relation to any society or class of societies for ensuring management thereof in
accordance with sound business principles or prudent commercial practices, the state
Government may, by order, direct that such society or class of societies shall prepare and
maintain its accounts in the form determined by the State Government, from time to time
and that cost audit or performance audit or both, of such society or class of societies, as
may specified in the order, shall be conducted.
This section also provides for performance audit. The sub rule (2B) of the section 81
provides that, “the cost audit ordered by the State Government should be carried by the
Cost Accountant, who is a member of the Institute of Cost and Management Accountants
of India constituted under section 3 of the Cost and Management Accountants Act, 1959.
The subsection further provides that the society shall cause such audit as per order issued
by the Government.
Definition of Cost audit: By the term “ Cost Audit” means the detailed checking of the
costing system, technique and accounts to verify their correctness and to ensure adherence
to the objective of cost accountancy. The another definition describes cost audit as “Cost
35
audit is systematic and accurate recording of detailed transactions and operations of

manufacturing, contracting, extracting, transporting, supplying, etc., so as to show the
actual cost of each individual piece of work, service, or separate process comprised in the
operations of the business.”
The cost audit is made applicable to the Sugar Factories by the Central
Government. However the State Government has not notified to which type of societies
cost audit is applicable. The cost audit rules are required to be prepared.
9. Objects of the Cost audit: The Cooperative Act provides the objects of the Cost audit
are:
1) The management is working on sound business principles.
2) The management has applied prudent commercial practices.
10. Performance Audit :- The performance audit is known as management audit also.
The management audit is defined as “ A comprehensive and constructive examination of
an organizational structure of a company, institution or branch of Government, or of any
component thereof, such as a division or department, and its plans and objective, its means
of operations, and its use of human physical facilities.”
The another definition describes the management audit, as “ Management audit is
an investigation of a business from the highest level downward in order to ascertain
whether sound management prevails throughout, thus facilitating the most effective
relation with the outside world and the most efficient organization and smooth running of
internal organization.
Management auditing is a method to evaluate the efficiency of management at all
levels throughout the organization, or more specifically, it comprises the investigation of a
business by an independent body from the highest executive level downwards, in order to
ascertain whether sound management prevails throughout, and to report as to its efficiency
or otherwise with recommendations to ensure its effectiveness where such is not the case.
11. Cost audit records :- The rules 65(2) requires the society to maintain such books,
records and accounts as specified by the State Government by general or special order for
the purpose of cost audit.
12. Social Audit: The cooperative societies are organizations run by the people, for the
people and to the people. The concept of cooperation to help by one to all and all by one.
This concept has socio economic aspect. As the members of the cooperative societies, are
formed for the enhancement, prosperity of the common man. The bigger institutions like
Sugar Factories, Spinning mills have developed the area by providing facilities like
medical, education, social activity centers and also provided employment to the rural
people. These benefits to the general public are not presented by the societies, in their
social income statement and balance sheet. It is agreeable that these societies have
facilitated to the rural and urban people.
The Concept of social audit is described as “ the concept of social audit is a vision
that at some future time corporations will assess their social performance in as systematic
manner as they now assess their financial performance. Such audit would be required both
for public reporting and for internal management purposes. The social benefit derived to
the staff, society, and general public are presented in the social income account and
accordingly social balance sheet should have been prepared.
36
CHAPTER IV
IV-1 PREPARATION FOR AUDIT AND FRAMING OF AUDIT PROGRAMS
1. Intimation of audit. - Since every auditor is likely to have a number of societies for
audit, he will have to plan and fix up priorities to complete the audit within the time limit
prescribed in the Act, and intimate each society he has to audit the probable date on which
he would commence its audit. Auditor should intimate the society with a request to the
Secretary, Manager or Managing Director of the society to bring the accounts up-to-date
and also keep ready the necessary statements and information required by him for purpose
of his audit. Sub-rule (8) of Rule 69 of the Maharashtra Co-operative Societies Rules,
empowers the Registrar to specify the form or forms in which the statements of accounts
and other information required for audit should be prepared by the society. Forms of
accounts, statements and other information required for completion of audit would, of
course, vary with the type of the society and the nature of the business conducted by it,
although many of the statements and schedules are common to all types of societies. It is,
therefore, necessary for the auditor to communicate to the society, in advance, the forms in
which the statements are to be prepared and what information he would require for
completion of his audit. Since the auditor has to certify that he has obtained all the
information and explanation required by him for his audit, statements and schedules
containing particulars of the operations and the financial position of the society will have
to be obtained and thoroughly checked him, before completion of his audit and thereafter
they will from part of his office records. For use of auditors a general list of statements
that are required for the purpose of his audit is detailed below, except described in
paragraph 5 of this chapter. The auditors may enhance it or shorten it as per their
requirement and type of society they are auditing.
Statement
Particulars of the statement information to be required
No.
Financial statements duly
1
approved by Board of Directors
2 List of the Managing Committee
3 List of Sub Committee
List of Managing officers ,
managers / chief executive officer
4
/ branch managers (officer defined
in Section 2 (20) of the Act.
List of amendment made in By-
5
laws during audit period
In case of Cooperative Credit Structure Entity
(SCB, DCCB, PACS) as prescribed by the
6 List of overdues
NABARD / RBI and in case of other the pro-
forma is appended in annexure.
List of balances of personal ledger
7
as per schedule and balance sheet
8 Bank reconciliation statements
List of vehicles, expenses incurred
9
on vehicle
List of movable / immovable Property registered should be maintained as
10
assets prescribed in the rule. Form no.X-1.
List of movable / immovable
11 With details of profit or loss
assets sold during the year.
37
List of members in J-1 and J-2

12
form
Statement of general information
13
and working of society
Statement of verification of cash,
14 stock and securities by board or
authorized person by the board
Loans and advances to directors
15
and their relatives
Other advances given to the
directors (such as travelling
16
advance, Anamat, any other
advance given for specific purpose
17 Loans and advances to employees
Demand collection and balance
18
statement
Schedule of investment and
19
confirmation statement
20 Schedule of NPA / BDDR
Schedule of directors who have
21 absented for 3 or months of board
meeting
Statement of misappropriation or
22
embezzlement
Schedule of arbitration, execution
23
and court cases
Books of accounts kept ready for audit
Day book, Cash book, bank book,
1 subsidiaries cash book and general
ledger
2 All personal ledgers
All committee’s and AGM minute
3
book
Bank passbook / statements with
4 balance confirmation certificates
of all accounts
5 Property register
6 Investment register
7 Stock book
8 Movable property register
Demand Collection and Balance
9
register in case of salary earners
Liquidity register in case of bank
10
and credit societies
11 Share transfer register
12 Member register in I form
13 Audit rectification register
2. Need to give prior intimation. -The intention in giving prior notice to the society of his
probably date of visit is to enable the society to write up its accounts up-to-date and also
draw up the statements required by the auditor for his audit. If the society is not given
prior intimation, it will probably complain that it had no time to prepare the statements and
schedules and possibly the writing up of the accounts also might have remained in arrears.
38
The staff of the society would also be busy in preparing the statements and hence would
not be able to attend to the auditor. As a result, the completion of the audit would be
delayed.
3. When prior intimation need not be given :- The societies have to appoint their auditor
for the current financial year in the Annual General body meeting, prior to close of the
financial year. The society is well aware of the auditor who is auditing his accounts hence,
the society need not be intimated the program but, the auditor should communicate the
dates of his visits to the society.
4. Procedure to deal with complaints. - Sometimes, complains are received by the

auditors about mismanagement and existence of serious irregularities in the working of a
society. In such case, the auditor, after going through the complaint letter carefully, should
refer to his audit notes and queries and see whether the contents of the complaints letter
are corroborated from the notes he has taken down during the course of his previous audit,
the queries and objections raised by him and replies of the management thereto. However,
he need not take any further action beyond acknowledging receipt of the letter and
informing the complainant that the points mentioned by him have been taken note of, and
would be carefully examined during the course of his visit to the society for audit.
However, if the complaints necessitate attention of the administrative officer, he should
forward them to the District Deputy Registrar with his remarks. If receives complaint/s
from the Registrar, addressing to take cognizance of it, he should carefully examine the
points raised in the complaint letter and take necessary notes in his audit report regarding
the trueness and materiality of the complaint. If such complaints are of financial nature he
should go through the accounts and if necessary take action as provided in the Act, or
otherwise of administrative nature he should send report with his comments to the
registering authority for further action to taken on his end.
5. Preparation of statements of accounts and information required for audit under Rule
69 (8) of the Maharashtra Co-operative Societies Rules. - The following statement and
schedules are always required by the auditor for completion of his audit, irrespective of the
type of the society and it is necessary that every society should prepare and keep them
ready as soon as intimation of audit is received from the auditor: -
1) List of account books and registers maintained by the society, including statutory
and statistical books.
2) List of files relating to audit including Rectification Report of previous audit,
inspection memos and visit reports of officers of the Department, the Reserve Bank, State
Co-operative Bank and Central Co-operative Bank, Supervising Union and other Federal
bodies to which the society is affiliated.
3) Summary of Receipts and payments during the year or trial balance as at the end of
the year. If the audit covers part of the year, the statement of Receipts and Payments
should be prepared separately for the period from the date of last audit to the date of
present audit.
4) Trading and Profit and Loss Account for the co-operative year for which the audit
is to be taken up and also for the further period if audit for the subsequently period is taken
up. Also, balance sheet as at the close of the year and also a tentative one on the date, if
the date is next to financial year, up to which the audit is to be carried out. These
statements should have been drawn up to comply as nearly as possible with the
requirements of Form “N” contained in the Maharashtra Co-operative Societies Rules.
39
5) Bank Reconciliation Statement/s as on the last date of the year, as also the date up
to which the audit is to be taken up. Bank balance certificates in respect of all bank
balances should be obtained directly from the banks by the auditor himself or the society
should be asked to request the banks to furnish these certificates direct to the auditor.
6) List of members of the committee and the sub-committees, if any, salaried officers
and members of the staff of the society. Where a large staff has been employed only a list
of important officers together with their qualifications, grades, present pay, period of
service and duties entrusted to them should be obtained.
7) Information regarding contingent liabilities and debts incurred, but not shown and
also losses made during previous years and provision made therefore.
8) List of overdue debts in the prescribed from classifying them as good, doubtful or
bad debts and details of action taken for their recovery. In case of societies advancing
loans and advances, the list of Non performing assets should be taken, as per guidelines
from the RBI/ Nabard or the Registrar, as the case may be.
9) Schedules of all types of personal ledger balance such as, -
a. Shares and subscriptions.
b. Deposits of all types, current, savings, thrift, recurring, cumulative, fixed small
pigmy, etc.)
c. Loans, cash credits, overdrafts and all other types of advances. Loans and advances
due from committee members and other office-bearers should be shown in a
separate list also
d. Lists of sundry debtors and sundry creditors, suspense payable or receivable
provisions made for outstanding liabilities, income received in advance, income
accrued but not received.
e. List of prepaid expenses, deferred expense and preliminary expenses still to be
written off.
f. List of unpaid interest on deposits, unclaimed dividend on shares and purchases,
bonus payable, etc. (year wise lists should be prepared).
g. Inventories of stock on hand including stores, spare parts, raw materials, semi-
finished and finished goods in case of processing and industrial societies.
h. List of dead stock articles, furniture and office equipment, machinery, tools and
implements, etc., showing their purchase price, depreciation charged year after
year and written down value.
i. Lists of share bonds, securities and other investments including fixed deposits held
by the society, giving their face value, book value and market value, supported by
market quotations as on the date of their preparation’s).
j. Particulars of immoveable property held by the society, agricultural land, building
plots, building, godowns, etc.
k. Lists supporting balance sheet figurers which are not mentioned above.
l. Any other statement or schedule considered necessary by the auditor for purpose of
his audit.
6. Additional information to be obtained in respect of certain types of societies. -Since
examination of overdue debts is the special responsibility of the auditor, particulars of all
overdues and action taken for their business operations. Thus, in case of credit societies,
information necessary for classifying all overdue debts into good, doubtful and bad will
have to be obtained. In the case of urban banks and societies, information regarding their
loan policy, collateral security for advances, maintained of fluid resources, etc., will have
to be obtained. In many of the societies, arbitration suits for recovery of money or for
other claims might have been filed by or against the society. In some cases, suits might
have been filed in civil courts. Detailed information on all these matters will have to be
40
obtained by the auditor. Since the auditor has certify that he has obtained all the
information and explanation required for his audit, statements and schedules mentioned
above and other information will have to be obtained and checked by the auditor before
completion of his audit and thereafter they will form part of the records of his office.
7. Working papers to be maintained by the auditors: The information given by the

society to the auditor includes in his working papers. These papers are required for the
further actions to be taken on criminal ground or administrative ground. The auditors
require to preserve his working papers for this purpose. The following papers / documents
and information form the part of audit working papers.
1) Byelaws of the Society including amendments made from time to time.
2) Extracts or copies of important legal documents, agreements and minutes relevant to
the audit.
3) A record of study of internal control related to accounting system.
4) Copies of audited financial statements.
5) Analysis of ratios.
6) Letter send to the Society asking explanations, clarifications
7) Notes on important points observed during the course of audit.
8) Important points of the last years audit report.
9) Audit intimation letter and letters regarding current correspondence.
10) Extract of minutes of Board of Directors, and sub-committee meeting related to the
current years audit.
11) Audit program and worksheet of the staff working.
12) Current audit’s working papers.
13) Confirmations and letters asking confirmations
14) Answer received from the societies, for the letters issued asking information and
clarifications.
15) Draft audit report and financial statements.
16) Statements of financial information related with current audit.
8. Account Books and Records to be maintained by Co-operative Societies. – a) Section

79 of the Maharashtra Co-operative Societies Act empowers the Registrar to direct any
society or class of societies to keep proper accounts with respect to all sums of money
received and expended by the society and the matter in respect of which the receipts and
expenditure of the society.
Rule 65 of the Maharashtra Co-operative Societies Rules further lays down that
every society shall keep the following accounts: -
1. A registrar of members including persons nominated under Section 38 in form “I”.
2. A list of active members in form J-1.
3. A list of non-active members in form J-2.
4. A registrar of shares.
5. A register of debentures and bonds, (where capital is raised by debentures and
bonds.)
6. Minute book recording proceedings of the general meetings.
7. Record of attendance of general body meeting.
8. Minute book recording proceedings of committee meetings and sub committee
meetings if any.
9. Cashbook
10. Day book
11. Bank book
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12. General ledger and personal ledger.

13. Stock register.
14. Property register in form X-1.
15. Register of auditors appointed and their written consent.
16. Returns of society in form Y.
17. Register of audit objections and their rectification.
18. Such other accounts and books as from time to time are specified by Government
by special or general order for any society or class of societies.
The byelaws of the society also specify what accounts and records are to be
maintained by the society and the committee shall determine what additional account
registers should be maintained by the society.
b) Cost audit Records: The society has to maintain cost audit records as prescribed by the
state Government, in addition to the books and records mentioned above.
9. Special Books and Registers to be maintained by certain types of societies . –

considering the business activity carried out by the particular society, they are required to
maintain the additional records as may be required in addition to the regular books of
accounts, records specified in the Rule 65. Thus, agricultural credit, multi-purpose and
service societies will have to maintain a loan register, a register of declarations obtained
from their members in accordance with the provisions of section 48 and Rule 47 (Form
“M”, prescribed in the Rules). They are also required to maintain an Assets Register
showing particulars of the lands held by their members. Societies, which accept fixed
deposits, are required to maintain a “Fall Due Register (Due date register)” of fixed
deposits. Banks and other credit institutions are required to maintain a “Demand,
Collection and Balance” register. Societies, which have undertaken trading or
manufacturing activities, such as consumer’s societies, marketing and processing societies
and industries societies are required to maintain Purchase and Sales Journals and Stock
Ledgers. When the numbers of securities held by a society are many and varied, an
“Investment Register separate cost accounts, which will have to be reconciled with
financial accounts. If the society has undertaken distribution of controlled commodities, a
number of additional books and registers, forms of which have been prescribed by the
Civil Supplies or other Controlling Government Departments like excise, are required to
be maintained.
10. Duty of Auditor to see that necessary account books are maintained. -It will be seen
that besides the statutory books prescribed under the above Rule, different type of
societies will have to maintain different books of accounts. Some books are common to all
types of societies, which have undertaken the particular types of activities. Rule 69 (3)
requires the auditor to report whether in his opinion, proper books of accounts, which give
all the information required under the Act, have been maintained by the society. It will,
therefore, be the duty of the auditor to see that all societies in his charge maintain proper
accounts and if any of the special account book or register is not maintained, he should
guide the society for maintaining the book or register. It is needless to add that unless all
necessary accounts are maintained more time would be required for completion of the
audit.
11. Powers of the Registers to get accounts written, Procedure to be followed when
accounts are incomplete. -Sub-section (1) of section 79 of the Maharashtra Co-operative
Societies Act empowers the Registrar to direct any society or class of societies to keep
42
proper accounts in respect of all transactions entered into by the society and to furnished to
him such statements and returns and to produce such records as he may require from time
to time and the officer or officers of the society shall be bound to comply with his order
within the period specified therein. Accordingly, where the auditor finds that the account
books are incomplete or the statements and information required by him for purposes of
his audit are not kept ready, he should report the matter to the Registrar or to whom
powers of the Registrar under section 79 have been delegated. (Government orders No.
CSL. 1467-443-C-3 dated 6-1-1968). The officers concerned will the issue an order under
provisions of the Section directing the society and its officers to bring the accounts up-to-
date and to furnish necessary statements and information required by the Auditor.
12. Responsibility for maintenance of accounts. -Byelaws of societies specifically lay

down that it shall be the duty of the committee to maintain necessary accounts and see that
the account books and registers are always maintained up-to-date. In case of the smaller
societies, particularly agricultural credit and other societies in rural areas, the secretary
himself writes the accounts. In case of the larger societies, however, which maintain a
salaried staff, an accountant is usually appointed for writing the accounts and preparing
statements. However, since most of the societies except a few in large cities are not in a
position to hire the services of competent and qualified accountants, the auditors should
advice such societies to get their accounts completed. However, there might be societies
the management of which might be indifferent or intentionally avoiding to maintain
necessary accounts on some plea or other and the auditor, in spite of his prior intimation,
may find that the account books are incomplete and the statements and information
required by him for his audit have not been prepared. In such cases, where it is not
possible to get the accounts written up and obtain information required for completion of
his audit, the auditor should politely apprise the committee of the position and point out to
the members of the committee their responsibility in this matter. He should also give
necessary instructions to the Secretary and the staff of the society and allow them time to
comply with his instructions. If, after lapse of a reasonable time, when he visits the society
once again, the accounts are found still incomplete, he should report the matter to the
Registrar, suggesting suitable action under provisions of section 79 of the Act.
13. Power of the Registrar to get account written. -Where the society has failed to
maintain proper accounts and the order of the Register issued under provisions of sub-
section (1) of section 79 has not been complied written the time specified in the order
under sub-section (2) of the Section, the Registrar has been empowered to take necessary
action at the expense of the society through a person authorized by him.
Under sub-section (3) of the section, the Registrar may also order that the cost of
getting the account books written up-to-date, assessed to the society, should be recovered
from the person or persons whom he considers responsible for not maintaining the
accounts up-to-date. Besides, for not complying with the orders issued by the Registrar
under the sub-section, such person or persons are further liable to pay to the society an
amount up to Rs. 100/- for each day until the Registrar’s directions are complied with.
14. Preparation for audit. -Since the auditor renders a professional service, it is absolutely
that he should possess necessary technical qualifications and skill for conducting audit,
since without adequate theoretical grounding and basic skill, no professional service can
be rendered satisfactorily. Although knowledge of bookkeeping, including higher
accountancy, budgeting technique, cost accounts and management accounts is necessary,
as without this knowledge, he cannot be said to have acquired adequate proficiency to
43
discharge his duties satisfactorily. It has also to be borne in mind that unless the auditor
can himself write the accounts, it is not possible for him to check them and pass them in
his audit. It has to be noted that the auditor is required to certify the correctness of the
accounts examined by him and no honest auditor can certify the correctness of the
accounts presented to him without having properly examined them. It is always, therefore,
a safe rule not to pass any entry in audit unless the auditor has properly followed its
implications. It is also necessary that the auditor should get himself fully acquainted with
the principles of auditing and the processes and procedures that have to be gone through
and the various tests that are required to be applied while conducting different audits,
which can only be acquired by undergoing an intensive and rigorous practical training
under senior and experienced auditors. Besides possessing a thorough knowledge of
bookkeeping and higher accounts and the principal of practical auditing, the auditor has to
have a thorough knowledge of the provisions of other statues, which have a bearing on the
working of the co-operative societies. The other statues, which have a bearing on the
working of the co-operative societies. The provisions of Income Tax and Sales Tax act,
Limitation Act, Insurance Act, Bonus Act, The Employees Provident Fund Act, Transfer
of Property Act, Sale of Goods Act, Contract Act, Registration Act, Stamp Act, etc., which
apply to the working of co-operation societies, are required to be studied. Besides, a
number of allied acts, such as the Agricultural Produce Markets Act, Agricultural Tenancy
and Land Holdings Act, Moneylenders Act, etc., are also required to be carefully studied.
The Reserve Bank of India Act, Nabard Act, Banking Regulation Act and Negotiable
Instruments Act, also apply to Co-operative banks and their provisions would have also to
be studied. The auditor has to submit specific report in respect of financial irregularities
and frauds and misappropriation. For this purpose, the auditor has to get acquainted with
the Indian panel code, Indian evidence Act, and civil and criminal procedure code to
decide the legality of such irregularities.
Most important of all, the provisions of the Co-operative Societies Act and the
Rules made there under are required to be studied quite in detail. The auditor should know
the provisions of each section of the act and Rules. The byelaws of the society regulating
its constitution, management and day-to-day working have also to be going through before
commencement of audit. The auditor is also required to be familiar with the content of the
various Government notifications and orders and circulars issued by the Registrar, the
Reserve Bank of India and the State Co-operative Bank and other Apex level institutions,
which have been notified as federal societies.
15. Need to obtain clarification and explanations. - During the course of his audit, the
auditor has to be satisfied that the transactions, which he is called upon to examine, are
proper, duly authorized and correctly recorded. For this purpose, he has to depend upon
the books of accounts and the evidence contained in the receipts, vouchers, bills, invoices
and other documents and also minutes of meetings, memoranda and correspondence. He
can also supplement the information available from the books by calling for clarifications
and explanations. It should not, therefore, be difficult for a trained auditor to satisfy
himself about the information by applying proper tests. However, in order to become
acquainted with the nature of the transactions and their various aspects, which he has to
examine, the auditor should get himself familiar with the type of activities undertaken by
the society, the accounting method adopted and the system of internal control in force. It
is, however, possible that the auditor may not always be familiar with the type of business
conducted by the society, since he is not expected to know the technical aspect of the
transactions of different societies he is auditing. There would, therefore, be occasions
when the auditor will be required to supplement his knowledge and obtain additional
44
information about the nature of the transactions. In such cases, by putting intelligent
questions, he should obtain the required information to enable him to understand and
comment on the transactions in an intelligent manner. It has, however, to be noted that
although ignorance on technical matters may be excused, the auditor should be careful
not to put questions, which might betray his ignorance of simple matters. All the same, it
is not safe to pass an entry in audit, if the precise meaning of which is not clear to the
auditor. It is, therefore, important that, the auditor, before he commences his audit should
acquaint himself with the type of transactions that he is required to check, the manner in
which they are recorded and the nature of documentary and other evidence that would be
available for the purpose. He cannot, of course, be expected to possess all the technical
knowledge of the methods of production and the processes, particularly if the society has
undertaken manufacturing or processing activities. In such cases, by going through the list
of account books and files maintained and discussing with the technical officers and the
accounts staff and also by going round the factory and watching the manufacturing
processes, it should be possible for the auditor to equip himself with adequate knowledge
of the technical aspect of the working of the society.
16. Need to study process of various systems :- Though the auditor is not technically
expert, he has to study the processes of various systems of business of the society. In the
manufacturing he has to study the process of manufacturing in detail with the record
maintained for recording the process. Such as in Sugar factory, he has to study the process
of sugar production, log books maintained for process, and material used, its
standardization for a unit of production, wastages for raw material, reasons, delay of
process, reasons for delay, break downs and reasons for them. Which he has to turn into
financial results, so that he can get the proper results of financial position, and the reasons
that have caused to losses occurred by the factory. The same skill he has to apply while
studying the systems in Spinning Mills, Oil Mills, Rice Mills, Chemical units and other
production units. While auditing service societies like Urban banks, Urban Credits,
Insurance Societies, he has to study the service process, by which he can get acquaintained
about the internal control, and can decide the extent of his checking, as well as can suggest
how the improvement is required by the society, to prevent the frauds and misapplications
of funds. While auditing computerized accounts he has to study the parameters set for
recording the accounts, which should be consistent with the standard accounting policies
adopted by the society. If parameters are not set as per accounting policies, the adverse
effect on financial position, required to be reported in his audit report.
17. Auditor not to approve entries in audit without proper understanding. - As already
stated, an auditor need not have complete knowledge of technical matters, since he cannot
be expected to be an expert in all the lines. However, it is his duty to acquaint himself with
all the aspects of the working of the society, the accounts of which he is called upon to
examine and certify. Care should, however, be taken to see that the questions to be asked
do not betray his ignorance of simple matters, as it is likely that such ignorance might be
taken undue advantage of by unscrupulous people. He should also take care not to arouse
suspicions in the minds of the persons whom he questions and those around him.
One of the greatest dangers to efficient audit is to approve entries, which are not
completely understood, because the auditor is afraid to betray his ignorance by putting
questions. It has, however, to be remembered that, should the auditor assume to possess
knowledge, which in fact he does not, he will inevitably make mistakes, which might lead
him into trouble. He should, therefore, not hesitate to ask for information upon
technical details of which he has no previous experience or knowledge. An auditor must
45
not approve an entry unless he understands its exact nature and is absolutely satisfied that
it is in order. In particular sometimes auditor is afraid to ask questions and consequently
approve the entries blindly trusting that they are in order, which is a very dangerous habit
which may lead them into trouble. An honest admission of ignorance of technical
matters and anxiety to acquire more knowledge will always win more respect than an
assumption of knowledge which is not in fact possessed the lack of which is almost sure
to be discovered.
18. Audit evidence: The proper evidence should be collected by the auditor before he
passes the entry, and draw reasonable conclusions therefrom on which to base his opinion
on the financial information. The term ‘sufficient’ refers to the quantum or adequacy of
evidence. The term ‘ appropriate’ refers to the relevance and reliability of evidence. Thus
the evidence should be adequate as well as relevant and reliable.
What constitutes sufficient appropriate audit evidence in a particular situation is a
matter of the auditor’s professional judgment. Some of the factors, which influence the
auditor’s judgment, are as below.
1) Misstatement in the financial information leads to negligence on the part of

auditor, if he certifies the same. The degree of misstatement depends on the nature of the
item under audit examination, the adequacy of internal control, the nature or size of the
business carried out by the society, and financial position of the society, situations which
may exert an unusual influence on the management. For example, a sugar factory, has
much sugar cane to crush, and the management wants to reduce the sugar cane price and
carry over the surplus balance to the next year, where the sugar cane seem to be short,
resulting loss. For recoupment of future loss the accountant with the knowledge of
management, debits expenses, which are not payable, showing them payable. In this
situation the auditor has to sort more information about the expenses that have been
provided. The correctness, and genuineness of the records he has to verity. The after only
he will be able to pass the entry.
2) Materiality of the item :- A material item would need to be supported by more

persuasive audit evidence as compared to an item, which is not so material. If, in the above
example the amount of expenses payable is minor will not materially effect, however a
sizable amount will effect the materially on the financial statement, and the evidence of
expenses, is not available, or after calculation it found that the re is no necessity of
provision. The effect is more on the financial statement, and the auditor has to take due
care and use his skill to find out the proper position.
3) The experience gained during the last audit :- If the auditor is auditing the same
society, he can use his last years experience regards internal control, integrity of the staff
and management, and can rely upon.
4) The results of auditing procedures, including frauds or error, which may have been
found. Thus, where an auditor applies certain audit procedures and finds material errors in
accounts, he will extend his audit procedures to obtain more persuasive audit evidence.
For example if the auditor finds that the there are big differences in the schedules balances
and balance shown in the balance sheet, he finds there are recurring mistakes in posting,
and totaling, he has to carefully apply his procedures in depth.
46
5) The type of information available. If in respect of certain items, the quality of

information available is not adequate, the auditor should seek more evidence. For
example, while certifying the bad and doubtful debts, the security of the advances, is
inadequate, it does not revel from the statements provided by the society, the auditor
should ask for the documents creating charge on the property mortgaged, actual
verification of the security if it is tangible.
6) Trends indicated by accounting ratios and analysis. By correlating various factors,

ratios provide a good indicator to the auditor to cross check whether the position as shown
in the financial statements seem reasonable or not, if not, he needs to seek more audit
evidence. For example if the gross profit ratio shows growth, though there is no sales
effected, the auditor has to verify the reasons for the same. It might be possible that, the
stock is overvalued. The stock is dormant and the value is increased while valuating it.
19. Reliability of audit Evidence: The reliability of audit evidence depends on its source
and nature as well as on the circumstances in which it is obtained. The generalizations are
as follows:
1) For expressing his opinion auditor requires, sufficient and appropriate evidence.
The auditor has to confirm about the relevance and reliability of evidence that has been
produced to him. Apart from this internal evidence he has to collect the information from
outside, by way of confirmations, obtaining abstracts from the banks and sundry debtors
and traders. The evaluations of this evidence may be generalized as follows:
a) External evidence is more reliable, as it is obtained from the outside sources.
Therefore,0 the confirmations received from the customer, traders and other are more
reliable in a normal audit situation, that the internal sources of evidence.
b) Internal evidence is more reliable when the related internal control is satisfactory.
c) Evidence in the form of documents and written representations is more reliable
than the oral representations.
d) Evidence obtained by the auditor himself is more reliable than the obtained from
the society.
IV-2 INTERNAL CONTROL
1. Internal control. -After equipping himself with sufficient knowledge about the nature
of the operations conducted by the society and the manner in which they have been
recorded, the auditor should proceed to study in detail the system of internal control in
existence. In modern times, no business can be conducted without having a sound system
of internal control, except very small concerns where the eye of the proprietor is
everywhere. Even in small agricultural credit societies, the work of the secretary has to be
controlled and supervised by the Chairman and the Committee. The system of internal
control in force forms the very foundation on which audit should be based. The audit
program in fact cannot be drawn up without complete knowledge of the system of internal
control in force. The selection of auditing procedures and processes and their application
tests to be applied, and the quantum of detailed checking work to be done, will all depend
on the auditor’s evaluation of the system of internal control in force.
2. Internal control, internal check and internal audit. -By internal control is meant “the
system established by the management in order to carry on the business of the society in
an orderly manner, safeguard its assets and secure as far as possible the accuracy and
reliability of the records. Internal control thus includes both internal check and internal
47
audit if there is an internal audit department. Internal check consists of the delegation or
allocation of authority and work in such manner as to afford checks on the routine
transactions of day-to-day work, by means of the work of one person being proved
independently by another, so affording a means whereby fraud is prevented and its early
detection facilitated”. Internal audit is described as a “review” of operations and records
sometimes continuously undertaken within a business by a specially engaged staff.”
3. Management of co-operatives and internal control. –By-laws of co-operative societies

specifically lay down the duties and functions of the Managing Committee and other
officers, such as Secretary, Managing Director, Manager, etc. In most of the societies,
besides attending to policy matters, members of the committee also attend to executive
functions and sometimes also take part in the conduct of routine transactions. A close and
careful study of the provisions of the byelaws of the society and the practical followed by
it should be conducted to understand the nature and extent of the administrative and
supervisory functions to be attended to by the members of the committee and other office-
bearers of the society and determine how far and in what manner the activities of such
honorary workers can be coordinated and fitted in, in order to evolve a sound system of
internal control. As regards internal audit, it may be mentioned that, although the byelaws
of many societies provide for the appointment of internal auditors and also define their
duties and responsibilities, very few societies appoint qualified auditors for carrying out
their internal audit. The banks having branches with deposit more than Rs.50 crores are
required to appoint auditor for concurrent audit.
4. Points to be considered while determining quantum of detailed checking. -In deciding

upon the extent of detailed checking work to be carried out, the following points should by
taken into consideration: -
1) The efficacy or otherwise of the system of internal control.
2) Reliability of the records.
3) The nature of the activities undertaken by the society.
4) The volume of transactions.
5) Arrangements for internal audit.
5. Difficulties in evolving suitable arrangements for internal control in co-operative

societies. -Except in case of very large institutions like District Central Banks, District
Marketing Societies, Co-operative Sugar Factories, Spinning Mills and other large
societies the staff appointed by the societies in quite meager and it is not possible to
evolve any scientific system of internal check. Byelaws of most of the societies provide
that the members of the committee and the Secretary in particular should supervise and
control the work of the paid employees. Duty is also cast on the members of the committee
to see that the accounts are written up properly and up-to-date and also to count cash on
hand and verify stock. However, this is rarely found to have been done in practice and in a
majority of cases, members of the committee do not have sufficient leisure nor do they
have the necessary business acumen to discharge their responsibilities adequately. The
federal societies to which the societies are affiliated are no doubt expected to guide,
control and supervise their working. However, these federal bodies do not have necessary
staff to carry out periodical inspections and they functions mostly as coordinating bodies
and act merely as a forum to voice the grievances of their member societies.
Auditors of co-operative societies and in particular auditors in charge of the
smaller societies therefore, have the added responsibility to assist the societies in their
charges to establish an effective system of financial and administrative control, which
48
would not only ensure that the business of the society is carried on in an orderly way and
its funds are not misapplied or misappropriated, but would also ensure the accuracy and
reliability of the records maintained and safeguarding of the property of the society. The
auditors should examine carefully the system in operation and should not hesitate to
mention in his report, the defects and deficiencies in the system and point out of the
managing committee their duties and responsibilities in this matter. In particular, it should
be seen that where the paid staff is inadequate and incompetent, the members of the
committee exercise adequate supervision. Even in small rural societies, provided the
members of the committee take due interest in the affairs of the society, it should be
possible to evolve a system, which would ensure accuracy and reliability of the records
and safeguard its assets.
6. Basic principles of Internal Control. -The basic principles of a sound system of

internal control are as under: -
1) All remittances received should be immediately acknowledged. Official receipts
from the printed receipt book signed by the officers authorized under the byelaws to sign
receipts should be issued, for all payments made to the society. For remittances, for which
official receipts are not issued such as withdrawals from bank, encashment of cash
certificates, sale proceeds of investments, etc., necessary arrangements to ensure correct
recording of the transactions should be made.
2) Vouchers signed by the payee should be obtained for all payments made by the
society. All payments should have been properly authorized. A system of making
payments only against authenticated vouchers should be introduced.
3) All payments in excess of a specified amount, should be made by crossed and
order cheques marked “Account payee, not negotiable”. It may noted that under the new
Rule 107-D of the Maharashtra Co-operative Societies Rules, 1961, all payments except
loans to members are to be made by cheques. There are some exceptions given in the
Income Tax Act, for payment, which should be made in cash. The limit prescribed in
Income Tax act for cash payment is Rs. 20000/-
4) All cash in excess of the amount specified in the byelaws should be immediately
paid in to the bank. Rule 107-C specifies the maximum amount of cash on hand which can
be maintained by different types of societies and also the by-laws lays down that all cash
in excess of the prescribed limit should be paid into the nearest branch of the Central Co-
operative bank or other approved bank within three days.
5) The closing cash on hand should be mentioned both in words and figures along
with the name and designation of the officers of the society having custody of the cash.
The byelaws should contain specific provision regarding maximum amount of cash to be
kept on hand and designations of the officers responsible for its custody. The Chairman
and the Secretary should sign the cashbook daily or other officers specifically authorized
to do so.
6) The work of bookkeeping should not be kept in arrears. The cashbook should
always be written up-to-date and the cash on hand verified daily. The general ledger and
the personal ledgers should also be posted up-to-date. Personal ledgers balances shall be
extracted monthly and agreed with the balance of the total account in the general ledger.
7) Monthly statement of accounts, viz., a statement of receipts and disbursements or
trial balance, manufacturing and trading account showing cost of goods produced and sold
during the month and also a provisional profit and loss account and balance sheet should
be prepared by the accountant and kept for consideration before the Board or the
Committee. This would not only ensure arithmetical accuracy of the accounts, but would
also enable the management to review the state of affairs of the society at regular intervals
49
and assist them in taking appropriate policy decisions. The bank accounts are also required
to be reconciled monthly. The differences in the agreement of various personal ledgers and
also branch accounts wherever they exist need to be traced by the society and the balances
reconciled at regular intervals.
8) All expenditure incurred should have been duly sanctioned. A statement showing
details of expenditure incurred should be placed before the committee from time to time.
9) The committee should meet as often as may be necessary, but at least once a month
to consider the affairs of the society.
10) The duties of the paid employees and matters to be attended to by the committee
members should be clearly defined. There should be a proper division of the duties and
responsibilities of the different members of the staff of as to ensure that another checks
the work of employee and no person however highly placed has the sole responsibility
for all the aspects of a transaction. Where the number of paid employees is sufficient to
set up an adequate system of internal control, the members of the committee should not
only exercise proper supervision over the work of the paid-staff, but also themselves
attend to certain specific administrative functions.
11) The cashier, who receives the cash should have no access to the ledgers and the
ledger-clerks should have no concern with the agreement of the ledger balances with the
control accounts, which should be attended to by a more responsible officer of the society.
12) Necessary control accounts should be maintained to ensure correctness of postings
of personal ledgers. Where the number of personal ledgers is large, separate control
accounts should be maintained for each ledger and all accounts posted to the individual
accounts of the members and other constituents should also be simultaneously posted to
the respective control accounts so that at any time the total of the personal ledger balances
can be reconciled with the balance in the total account in the general ledger.
13) Security as required under Rule 107-B of the Maharashtra Co-operative Societies
Rules and by-laws should be obtained from all officers and the employees of the society,
who come into possession of cash or other property of the society.
14) All cash, stocks and other property of the society should have been adequately
insured. Preferably, a blanket policy insuring cash in safe and in transit, fidelity of staff,
etc., should have been taken out. All fixed assets such as buildings, plant and machinery,
tools, furniture and equipment, vehicles, etc., and also stock in trade, raw materials, stores,
finished goods, etc., should have been adequately insured.
7. Internal Control where the accounts are maintained on computers: Many large
societies, even the smaller once are maintaining their accounts on computers. The
Computerized environment required more accurate and vigilant system of internal control,
as there is possibility of corrupting record, loosing confidentialness of information, and
information leakages in the hand of unscrupulous peoples. The main areas of internal
control are as follows.
1) The control environment: 1.1 the environment control mainly relates to the security of
data, which includes a) Information technology authorization structure. B) Segregation of
duties, c) Computer operation to ensure that the system is used only for authorized
purposes. D) Restricted access to the authorized personnel only. E) Use of authorized
programs only. F) Detection and correction of processing errors.
1.2 System audit: it includes the review and audit of software development, acquisition
and maintenance application, database and systems software.
1.3 Ensuring continuity of IT functions: this is possible with back up of data, machines
and programs, site and personnel. Business continuity planning prescribes recovery
procedures in the event of a disaster.
50
2) Application Control: Includes: a) file continuity b) Asset protection c) Transaction

Control regarding completeness, accuracy and authorization. D) User controls.
3) Accounting Controls
For evaluation of internal control in computerized environment a questioner has been
described in the manual elsewhere, the auditors are required to study them, and apply it
while auditing these societies.
8. Bank Reconciliation. - Bank Reconciliation statements should be prepared regularly by

the cashier or the officer who receives the cash Bank statements or the Pass Book. During
the course of their audits, the auditors should compare the debits and credits shown in the
Bank statements (or the Pass Book) with the entries in the cashbook and the counter-foils
of the paying-in-slips and the cheques issued. Contra items either in the cashbook or the
Pass Book should be enquired into. The items in the Reconciliation at the end of the period
should be traced through the following period.
9. Evaluation of the system of Internal Control. - In brief, any system of internal control,
worth the name, should ensure the following:-
1) All remittances received are correctly entered under their respective heads of
accounts and all income received is duly brought into account.
2) All expenditure incurred is genuine, incidental to or necessary for the business of
the society and has been properly authorized and debited to proper head of accounts.
3) All the property belonging to the society is properly accounted for and
safeguarded.
4) All liabilities incurred are properly recorded and due provision is made for all
known or expected losses.
5) The books and records provide reliable basis for preparation of the final accounts,
so as to enable the auditor to certify their correctness.
6) The basic principles of a sound system of internal control explained above should
be borne in mind. While evaluating the system in operation in the society, the accounts of
which are being audited, the auditor should particularly bear in mind: -
a) Where there is possibility of collusion as will as combination of duties, which
enable one person to conceal irregularities.
b) Whether is possibility of collusion between close relatives, occupying elective posts
or salaried employees, working in related part of the business?
c) Whether there is possibility of conflict of interest of the society in case of a director
or other responsible officer having other similar business interests. Although specific
provisions in this regard are contained in the Maharashtra Co-operative Societies Act
and the Rules, these provisions are found to be inadequate and can be easily by-passed.
10. Auditing in depth. - During the course of his audit, the auditor has to trace a
transaction, through its various stages from origin to conclusion examining at each stage,
the voucher, records and authorities relating to that stage and observing the
appropriateness and efficacy of the system of internal control in operation and exercise of
authority by proper persons. Thus, while examining disbursement of loans in an
agricultural credit society, it is not enough to compare the entry in the cashbook with the
acknowledgement of the borrower contained in the loan bond or a separate voucher
obtained for him. Complete verification of the transaction known to the auditors as
“examination in depth” involves scrutiny of the following documents, as illustration for
loan disbursed in PACS: -
i) Application for loan received from the borrower and his account in the loan ledger
to ascertain details of repayment of previous loans taken by him. His share account will
51
also have to be seen to ascertain the value of shares held by him and also to check the
amounts deducted from the amount of loans sanctioned to him from time to time.
ii) Normal credit statement to ascertain the credit limit sanctioned to him both for
advances in cash and in kind.
iii) Declaration executed by him under section 47 of the Maharashtra Co-operative
Societies Act.
iv) Resolution of the committee sanctioning the loan.
v) Application to the bank and resolution of the committee for drawl of the amount
from the maximum credit sanctioned to the society and approval of the Bank.
vi) Loan Bond executed by the borrower.
vii) Entry in the Loan Register and in the Loan Ledger.
11. Test or percentage checking: - An examination in the detailed manner indicated

above, which is known to the professional auditor as “auditing in depth” cannot be
carried out in respect of all the transactions of a society except where the society is a small
institution and its transactions are not many, it should be possible for them to carry out
complete checking of all the transactions, in other words, to carry out cent percent
checking. However, in case of auditors, who have to audit large types of societies, it may
not be possible for them to carry out detailed checking of all the transactions. They should,
therefore, carry out a careful evaluation of the system of internal control in operation and
if their appraisal proves satisfactory, they may in appropriate cases rely on a test
examination of some of the records. It is needless to point out that selection of the period
should be made carefully and the examination of the transactions of that period should be
sufficiently detailed. It has always to be remembered that the efficacy of an examination in
depth depends on the care and skill with which the intermediate steps are examined.
The Registrar has issued a number of circulars which contains detailed instruction
regarding test checking or percentage checking. These should be carefully gone through
and it should be seen that the quantum of detailed checking prescribed by the Registrar in
respect of different societies, is carried out. It should, however, be noted that the
percentages suggested are in respect of normal audits, but where frauds and serious
irregularities are noticed, a more exhaustive checking (cent percent if considered
necessary) should be carried out in order to ensure that no fraud or irregularity lies
hidden unnoticed by the auditors.
12. Sample audit: Auditor has to express his opinion on the financial position of the
society, about the fairness and true position, based on an examination of records of
transactions and other relevant information. However, in the large institutes the number of
transactions are enormous, and it is not possible for the auditor to check them on cent
percent basis. He has to sample them from various transactions. This enables the auditor to
complete his audit within reasonable time and cost. The samples decided are so, that the
further detailed checking serves no purpose, after the checking of sample transactions. It is
almost admitted by the professional bodies, to carry out the audit by the selective
verification by sampling. Institute of Chartered Accountants of India of India has also
issued the SA 530 on this, which states as, “The auditor should design and select audit
sample, perform audit procedures thereon and evaluate sample results so as to provide
sufficient appropriate audit evidence.” The objective of auditor when using audit sampling
is to provide a reasonable basis to draw conclusions about population from which sample
is selected. While designing audit sample, auditor should consider objective of audit
procedures and characteristics of population to assist in effective and efficient design of
52
sample, stratification may be appropriate. Stratification is process of dividing population

into sub population.
When determining sample size, auditor should consider sampling risk, tolerable
error and expected error. If auditor expects error to be present in a population, large
sample needs to be examined to conclude that actual error in population is not greater than
planned tolerable error. Auditor should select sample items in such a way that sample can
be expected to be representative of population. This requires all items in the population
have an opportunity of being selected. After having carried out these audit procedures on
each sample item that are appropriate to particular audit objective, auditor should analyze
any errors detected in the sample, project the errors found in the sample to the population
and reassess sampling risk.
13. Ledger audit: As a part of sample audit, auditor can select his samples from the
General ledger for some transactions such as, accounts from the profit and loss accounts
where expenditure accounts. For example while checking the stationary account the
auditor can select bigger accounts of stationary expenses and that are thoroughly checked.
This will cover the most of expenditure made this account. This can be extended to
Expenses related to salary and allowances, advertisement, donations, legal charges, repairs
and maintenance of assets and vehicle, depreciation, provisions for reserve s and bad
debts, Incomes like, commission, miscellaneous receipts, sale of assets, and some reserve
accounts.
IV-3 AUDIT PROGRAM
1. Preparation of the programs of audit. -As we have seen, the auditor carried out his
work largely be means such as. -
(a) Evaluation of the system of internal check for both soundness in principle and
effectiveness in operation.
(b) Close and careful scrutiny of the accounts books, vouchers and other documents.
(c) Agreeing the final accounts, viz., the profit and loss account and balance sheet with
the books of account.
(d) Verification of assets and liabilities.
(e) Observation, enquire, calling for clarification, making of statistical comparison and
such means as may be considered necessary.
Practical auditing thus consists of a proper evaluation of the system of internal
control in operation and carrying out certain routine processes and procedures known
to the professional auditor as vouching, calling over, posting, casting, carry-overs, etc.
However, these are only general terms and since the object of audit is for the auditor to
satisfy himself about the geniuses and correctness of the accounts, careful thought will
have to be given to the nature of tests to be carried out. It will also have to be noted that
the scope of the processes and procedures mentioned above cannot also be clearly define
and will depend upon the system of accounting and preparation of records adopted by
the business.
From a close study of the provisions of the byelaws of the society and information
collected about the nature of transactions and the methods adopted for the recording and
careful perusal of the list of books and accounts maintained by the society, the auditor
should be able to map out his program of work, for completion of his audit. During the
course of his evaluation of the system of internal check in operation, the auditor should try
to ascertain loose points existing in the functioning of the society and map out his
program, of detailed checking accordingly, so that these loose points would receive special
53
attention. The arrangements made for proper authentication of the accounts are records
should also be ascertained so that responsibility might be fixed whenever occasion arises.
2. Need to prepare programs of audit. -Since the auditor is required to complete the audit
within the time allotted for it, it is absolutely necessary that he should prepare an audit
program detailing the items of work to be carried out and distributing the work amongst
his assistants. The audit program in order to be effective has to be based on a standard
model, which would contain all the usual items. The auditor may then adopt the standard
program after making suitable additions and modifications therein to take account of the
efficacy or otherwise of the system of internal control as revealed by his review of the
accounting procedures and of the peculiarities of the activities undertaken. The audit
programs will not only record the exact details of the work to be performed by the auditor
and his assistants, but will also have columns for the initials of the persons performing
each part as and when they complete it. The auditors even though single-handed, should
also prepare audit programs before commencement of their audits. It has to be noted that
every auditor, irrespective of his professional status or academic qualifications, is required
to have very clear ideas as to the exact nature and extent of the work to be executed by
him. Without framing the audit program, the auditor will be groping in the dark with no
clear ideas as to what has been done and how he has carried out his work so that he may
be able to prove that he has carried out his work logically and efficiently and has applied
due skill and diligence. Audit program will also guard against possible omissions and
ensure through and systematic checking thus helping to avoid waste of time and energy
resulting from haphazard and unsystematic checking. The auditor will also be able to
complete the audit within the time allotted to it. It is, therefore, needless to point out that
even when the Auditor works single-handed, he must prepare his audit program.
3. Standard Audit Programs. -The Registrar under his circular No. ADT-552-CP, dated
2nd June 1972, has prescribed the form in which the consolidated audit program for all
types of societies should be prepared. Instructions regarding framing of the program
should be carefully noted. A program on the lines of the standard program prescribed by
the Registrar with suitable modifications as warranted by the type of the society and nature
of its activities should be prepared. This program should be referred to quite often and
progress of audit ascertained.
The enclosed standard audit programmed is suitable for audit of average-sized
credit societies including salary earners’ societies, small industrial societies and consumers
stores, etc. it is not complete in all respects although most of the items of routine checking
and other aspects of higher audit including review, verification and reconciliation which
are to the carried out during the course of an audit, are included therein. It has to be
modified and developed suitably by the auditors in accordance with the type of business
conducted by the society, and additional items may have to be included as warranted by
the circumstances of each audit. “For special types of societies, such as farming societies,
housing societies, Department stores, sugar factories, spinning mills and other industrial
societies transport societies, forest labour’s societies, labour contract societies, etc., a
number of additional items will have to be included. In case of smaller societies and
societies which do not conduct business to which the itemed relate and such items as have
no application to the business conducted by the society, will have to be omitted and
necessary changes will have to be made in the standard audit program to ensure that all
salient features of the different types of societies receive due attention. A consolidated
audit program on the line explained above will have to be drawn up for each society in
charge for audit and each item of work, as and when completed, will have to be signed by
54
the members of the audit part concerned. After the work as per the audit program has been
completed, the head of the unit should check individual items and satisfy him that all the
items of work included in the audit program, have been carried out. The audit program
together with the audit notes, queries, draft accounts checked by the auditor, statements
and schedules and other working papers should be filed in the file of the society along
with the mark-sheet or explanatory note for award of audit classification to the society in
the form prescribed by the Registrar.
Format of standard audit program and applicability to the societies is appended as
Annexure I at the end of the manual.
4. Audit Program to be revised from time to time. -It is needless to add the careful thought
should be given before drawing up the audit program. The different aspects of the
transactions to be checked, should be carefully studied, so that all-important items receive
due attention. The audit program thus drawn up enables the audit party to proceed with
their work methodically. It has, however, to be noted that the audit program may have to
be revised quite often during the progress of audit. In fact, it should never be allowed to
become stereotyped or obsolete and it should be revised from time to time according to
circumstances and should be continuously kept up-to-date.
5. Allocation of work amongst the assistants. -Since the work involved in the auditor of
large institutions such as District Central Co-operative Banks, Urban Banks, Marketing
societies, processing societies, Sugar Factories, Spinning Mills, etc., is voluminous, it is
not possible for the Chief Auditor to attend to all the work himself. A major portion of
routine checking and other work will have to be entrusted to the audit assistants. It is
needless to add that important items of work should be attended to by the Chief Auditor
himself and only routine checking and other work of lesser importance may be entrusted
to the assistants. The following items of work will have to be attended to by the Chief
Auditor himself : -
1) Vouching of the debit side of the cashbook, except minor payments and other fixed
charges, which are being paid regularly. The Chief auditor may check vouchers on the
sample basis.
2) Breaches of the provisions of the Act, Rules and byelaws.
3) Perusing the minutes of the general meeting, Board/managing committee and sub-
committee meetings.
4) Verification and valuation of assets and liabilities including verification of cash,
confirmation of bank balances, verification of share certificates, securities title deeds to
immoveable properties, etc. Verification of collateral securities including government
securities, shares certificates, insurance policies, gold and silver ornaments, inspection of
godowns, periodical stock returns, insurance policies of godowns, etc.
5) Scrutiny of loan balances and other sundry debtors’ balances, checking overdues
statements and classification of overdues into good, doubtful and bad.
6) Adequacy of provisions made for doubtful debts (NPA’s) and loans.
7) Scrutiny of control accounts, and agreements with schedules of balances and
supporting lists.
8) Scrutiny of financial position of the society including scrutiny of balance sheet and
profit and loss account.
9) Appropriation of profits, treatment of capital profits and provision for income.
10) Allocation of expenditure between capital and revenue, deferred revenue
expenditure, etc.
55
11) Provision for outstanding liabilities and provision for overdue interest,
depreciation, taxes, etc.
12) Reconciliation of bank accounts, accounts of branches and other balances.
13) Scrutiny of operational efficiency of processing and manufacturing units by
application of normally accepted standard and norms. Reconciliation of cost accounts with
financial accounts.
14) Scrutiny of reasons for losses, shortages, wastages, etc.
15) Observance of conditions in respect of borrowings from Government and financing
agencies.
16) Proper utilization for financial assistance received from Government.
17) Scrutiny of terms and contracts entered into with various parties.
18) Scrutiny of store accounts, cost accounts, processing and production account,
allocation of stores and wages and overdues.
19) Scrutiny of use of vehicles.
20) Physical counting of cash, securities and stores.
There might also be other items of work, which the Chief Auditor might consider
to be sufficiently important to be attended to by him. The other items of work may be
entrusted to his assistants according to seniority, experience ad qualifications. However,
these would depend on the Circumstances of each case, considering the importance of the
society, volume of its transactions and the qualifications and experience of the staff
assisting the auditor. No matter, however, qualified and experienced of the staff assisting
the auditor. No matter, however, qualified and experienced his assistants may be, the Chief
Auditor should always bear in mind that the entire responsibility for the proper conduct
of audit rests on him. He should, therefore not leave important items of work like those
enumerated above, to his assistants, but should pay his personal attention to them. He
should also exercise proper control and supervision over the work of his subordinates.
The Registrar has issued a number of circulars specifying the various items of
work, which should be attended to by the Chief auditor himself. Such instructions have
been issued in respect of audit of urban and central banks, salary earners societies, sugar
factories, etc. [Please see circulars No. ADM/243 dated 3-6-54, No. ADM/Sugar factories
dated 26-11-69 and No. ADM/243 (CFAs.) dated 7-11-67]. The instructions issued by the
Registrar should be carefully studied and in view of their special importance, these items
of work should not be left to audit assistants. Whatever work is entrusted to the audit
assistants clear instructions should be given, orally or in writing where necessary, so that
they may have a clear idea as to what is to be done, how it is to be done, what points are
to be noted in connection therewith, etc. The various processes and procedures for
conducting audit, the types of tests to be applied should be explained to them in detail and
they should also be aware of the types of irregularities they are likely to come across.
After the audit assistants have carried out their part of the work, it should be test checked
to see if any important points are missed. In this way, the auditors are encouraged to gain
self-confidence and encouraged to become active partners in all that pertains to
performance of efficient audit.
6. Method of working and training of audit assistants - Auditors are ordinarily expected
to work in batches of two, one senior and the other junior, the more mechanical part of
audit work like vouching, posting, calling over, etc. being shared both by the auditor or his
senior assistant and the assistant. This should ensure that the junior members of the staff
are given ample opportunities for acquiring knowledge and experience in the various
branches of audit work. The division of work in the offices of Chief Auditors in no doubt a
matter of internal organization, but it should be so arranged as to give a thorough insight
56
and experience to the junior members in the difficult and more complicated part of audit.
The need for training the clerks and assistants so as to get an adequate output of work
consistent with efficiency is all the more in case of Chief Auditors as it is practically
impossible for them to pay adequate attention to all the work. In order that the work is not
carried out in a mechanical way, and the audit clerks and other subordinates in charge do
not loose their sense of responsibility, it should be impressed upon all the members of the
staff that the programs set out for them is the basis upon which the audit has to be
conducted and that they must use their intelligence while carrying it out. They must be
encouraged to think out for themselves and make surprise checks outside the audit
programs and suggest additions and improvements in the scheme. Experience has shown
that serious discrepancies are generally revealed by surprise investigation and
intelligent enquiries, which fact should always be borne in mind? In order to give time to
the Secretary or the Accountant to bring the books upto-date and also to draw up the
information required for audit, the order of the various items of work to be carried out,
specified in the audit program, may stably be changed. Thus, for example, vouching the
payments side of the cashbook might have to be postponed in order to give time to the
Secretary to attend the payment vouchers so that the time of the auditor in tracing the
supporting vouchers will not be wasted. Similarly, if the personal ledger balances are not
extracted and agreed with the total accounts in the general ledger, other items of work
remaining from the audit program like scrutiny of the minute books, checking of the
members’ register etc., will have to be taken up.
7. Responsibility of Auditor for proper conduct of audit. - As we have seen, Auditors in

charge of large and important societies are given audit assistants to assist them in their
audit, as it is not practicable for them to attend personally to all the work connected with
audit. The extent of work, which the Auditor would do personally, and work, which is to
be entrusted to his assistants, will have to be decided by him. However, the Auditor alone
will be responsible for the proper conduct of audit even though much of the audit work
will have to be carried out actually by his assistants. It is, therefore, necessary that the
progress of audit work should be kept under careful watch in order to ensure that it is
proceeding on right lines and according to the program prepared by him. Auditors should
see that the audit assistants assisting them have properly understood the nature of their
work, the manner in which it has to be carried out and the departs and irregularities which
are likely to exist and have to be noted by them.
8) Control of the quality of audit work: The Institute of Chartered Accountants of India
has issued guidelines, regarding quality of work in general and procedures to be followed
when work is delegated to assistants in and individual audit. The guidelines suggest that
the quality work is maintained if the following objectives are achieved.
1) Personal qualities: The auditor should follow the principles of integrity, objectivity,
independence and confidentiality.
2) Skill and Competence: The auditor has attained and maintains requisite skills and
competence.
3) Assignment: Audit work should be assigned to personnel who have the degree of
technical training and proficiency required in the circumstances.
4) Directions and supervision: There should be adequate direction and supervision of
work at all levels.
9. Maintenance of worksheets. - Separate worksheets mentioning details of work done in

respect of every society audited should be maintained by each member of the audit staff
57
(including the Auditor himself), taking part in the audit. Worksheets will be of two
types, one will contain details of work done from day-to-day and the other will be
regarding total checking and other work done, i.e. consolidated audit program. As already
suggested, before commencement of actual audit, a detailed consolidated audit program
should be prepared on the lines of the model audit program. As soon as a particular item of
work is completed, by a particular member of the audit party or by a batch of two
assistants, his or their signatures should be obtained against that item. The audit program
should cover all the items to be covered during audit although the various items of work
will be distributed amongst the different members of the staff according to their seniority
and experience. From the work sheets maintained by the different members of the audit
staff, the consolidated audit program will be filled in. The worksheets and the consolidated
audit notes, query sheets, statements, final accounts and other routine papers relating to the
audit of the society.
The Registrar in his circular No. ADM/243 dated 12-6-59 has directed that all
audit assistants should maintain their worksheets, showing details of work done by them in
the following form: -
Daily Worksheet of Shri……………………………audit assistants ………………
Name of the Society ………………………………………………………………….
Period of audit: From:…………………………To…………………………………..
Date Serial Particulars With whom Period Other Initials Initial
No. of of work done name covered details of the
the item done of the other from - to regarding officer
in the member of vouchers,
audit the batch specific
program books,
files, etc.
1 2 3 4 5 6 7 8
The last three columns in the consolidated audit programs should be filled in the
form as worksheet.
10. Technique of audit. - Use of ticks or check marks. - While carrying out the routine
checking for the mechanical part of the audit, the auditor has to make “ticks” or
“checkmarks” for every entry in an account book or register examined by him and also
initial or cancel vouchers by means of rubber stamp. Every receipt or voucher, invoice,
bill, statement or other supporting documents initialed or signed by him is an evidence of
his having been satisfied about the genuineness of the documents and the correctness of
entry passed by him in his audit. The making of these ticks or check marks is quite
necessary as they serve as an evidence of an Auditor having checked and compared the
entry with the particulars mentioned in the supporting Documents, statements, or other
records and passed it in his audit. The tick or the check-mark and the initials of the auditor
also serves as an evidence of cancellation of the supporting document after having served
its purpose, viz., serving as evidence of the correctness of the entry made in the books so
as to prevent its production once again in support of another subsequent entry. The ticks or
check marks should, therefore, be clear enough so that they can be recognized at any time.
The use of these ticks and check-marks, their size, length, angle and other peculiarities are
not uniform and every auditor is, therefore, free to have his own method of ticking or
marking an entry in the books as evidence of his having “passed” it in his audit. Most of
the professional auditors use rubber stamp bearing the names of their firms for canceling
receipts, vouchers and other supporting documents signed by them.
58
11. Type of “ticks” or “check marks”. - The following are the usual ticks or check marks
which are supposed to be used by the Auditors to indicate the different processes and
procedures of audit carried out by them. If some auditors are using different tick or check
marks, they should use following ticks or check marks for items of audit work shown
against them with a view to have uniformity in this respect: -
Work Area Types of ticks
Posting On the right hand side of the figure close to
the last digit. \
Or /
Casting or totaling On the left hand side of the figure checked
Carry forward Same as above with an additional posting tick

across the tick like
Calling over or At the bottom of the figure.
comparing
Vouching On the left side of the figure, the horizontal
line covering a part of the figure. Some time,
the tick is put on either side of the figure.
Bank pass books The posting tick on the right hand side
or statements unticked items; i. E. items appearing in R
reconciliation would have the letter “R” place
on the right hand side.
Contras or On the right hand side. C
transfers
These ticks or check marks should also be distinctive and should be indicative of
the particular process or procedure carried out or the test applied for. Particular care
should be taken to see that the staff of the society whose accounts are being audited does
not know the significance of these ticks. While carrying out different processes and
procedures which form part of routine checking, distinctive ticks or check-marks should
be made so that every member of the audit party including the principal should always be
able to recognize his own ticks and state definitely what books and registers have been
seen by him and what portion thereof or what type of entries have been checked by him.
12. Use of coloured pencils. - For marking the ticks or check marks, the auditors are
required to use coloured pencils. Auditors of the Cooperative Societies are required to use
green pencils and their audit assistants are required to use blue pencils. The staff of the
society should be requested not to make use of these pencils for their internal checking.
13. Calling out figures and description. - While calling out the figures, audit assistants
should be careful to speak out clearly or otherwise mistakes may be easily passed. For
example, while calling out figures, “Twenty”, “Thirty”, “Sixty”, etc., the ’ty’ should be
emphasized and called out as twenty (twentie), thirty (thirtie), sixty (sixtie) etc., the ‘ty’
being called out as tie. Rs. 20.06 should be called out as twenty zero six or Twenty Rupees
and six paise. As already explained, audit staff work in batches of two, the mechanical part
of audit work like vouching, posting, calling over, etc. being carried out by two persons,
one calling out the figures and description of the entry from the cashbook or other register
and the other person tallying the particulars with the figures and description in the voucher
or other document or entry in another book.
59
14. Corrections and overwriting in accounts. -While carrying out this audit, the auditor
should be careful not to make any alternations in the figures originally entered. He
should not also make any entry in the books or statements himself or make any notes in
the vouchers, statements or other documents which he is checking, if the figure
appearing in any book or register is not distinct or appears to have been corrected or
overwritten, it should be very carefully examined in order to see whether the correction
made is authentic or deliberate. Use of erase or knife for scoring out or earnings figures
should be discouraged. If many corrections are required to be made, the original figure
should be dislodged. If many figure should be entered distinctly on the top of the original
figure or along side. The Accountant or any other responsible officer in charge of
accounts should be asked to make the corrections and the Auditor should not make any
corrections himself. All corrections should be invariably supported by initials of the
officer authorizing them. If any figure is illegible or the auditor is not clear about it, he
may encircle the figures with his coloured pencil and write the correct figure distinctly in
the margin or along side the original figure so as to assist him to recollect the figure. In
any case, it should be seen that the figure checked while vouching is taken both in totaling
and posting.
15. Entries in Pencil to be got inked before checking. -Many times, the auditor comes
across entries made in pencil. It should be noted that entries made in pencil, particularly
figures written in pencil, can be very easily altered and hence no auditor should accept
entries in pencil. He should immediately ask the accountant or any other officer of the
society to ink out the figures and initial them. Many times, totals and balances are entered
in pencil. Although totals or balances might be correct, still, it is necessary that they
should be inked out and the Auditor should take particular care to see that all entries
passed by him in his audit are inked out before he puts his tick or check mark on them.
16. Account books to be got written up completely before commencement of audit. -As
far as possible, the auditor should not commence checking up of an account book until it
has been written up completely for the period for which the audit has been taken up. On no
account should he check figures in pencil even though he is assured that the figure would
be inked out in due course. Each stage of work should be completed at one sitting, if
possible. For example, while checking cashbook vouchers, for a month or other specific
period, the whole should be checked and notes made of missing vouchers and irregular
payments. Similarly, each part of the other work like checking of loan bonds, posting,
calling over, etc. should be completely checked and record made in the “Daily Work
Sheet” maintained by the auditor and his assistances of the exact stage upto which the
checking has been carried out. These suggestions are of special importance to the auditors
who are in charge of audit of certain types of societies.
CHAPTER V
V-1 ROUTINE CHECKING AND HIGHER AUDIT
1. General: As we know, the work of audit consists of carrying out certain processes and
procedures and applying certain tests, which would enable the auditor to satisfy himself
about the reliability of the accounts and the correctness of the profit and loss account and
the balance sheet. It is therefore, needless to add that the auditor should be fully
acquainted with the nature and significance of the various processes and procedures that
are required to be carried out and also be able to determine the appropriate tests for
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ascertaining the reliability of the accounts. Further, since he has to express his opinion on
the balance sheet and profit and loss account, he must do all that he deems necessary to
form an opinion thereon and report to the management of the society and the Registrar.
Audit work may, therefore, be divided into the following parts.-
(i) Preparation: A close and complete study of the system of internal control, with a view
to find out deficiencies and loopholes and its effectiveness in practice, the desirable
features of a sound system of internal control have already been discussed
(ii) Routine checking: An exhaustive examination of the routine transactions, the extent of
which would depend upon the auditor’s assessment of the soundness of the system of
internal control and its effectiveness in practice. In case of most of the smaller and
medium size co-operative societies, however since a satisfactory system of internal control
cannot be introduced for want of adequate paid staff, the transactions will have to be
checked on a cent percent basis. The method of checking routine transactions and points to
be noted during the course of checking, have been discussed in the following paragraphs.
(iii) Review or higher audit: Checking of profit and loss account: The principles
governing preparation of the profit and loss account and certain specific items which call
for special attention, such as allocation of expenditure between capital and revenue,
depreciation, provision for bad debts and losses, etc., and also allocation of the net profits
will be discussed in the following chapter.
(iv) Checking of the balance sheet, verification and valuation of the various items of
asset, verification of liabilities, etc. These would be discussed in another chapter.
These are fundamentals upon which adequate time and attention should be devoted
by the auditor and his staff. Routine checking or mechanical checking also forms an
important part of audit work and has to be carried out diligently and intelligently. in fact,
routine checking forms the very base of audit work as many of the tests to be applied and
the extent of their application would depend upon the results of routine checking. The
educative value of routine checking also assumes considerable importance in the audit of
the smaller societies since it is only by observing how the auditor conducts his audit and
noticing what types of defects he has pointed out, that the management becomes aware of
their mistakes and how they could be avoided in future. It has also to be remembered that
the auditor has also to act as an advise and thus to function as an aid to management. In
order to discharge this function properly, he has to examine a number of documents and
call for additional information, which the professional auditor is not normally required to
do.
2. Importance of Routine checking- As regards the mechanical part of audit, routine

checking as it is generally called, different processes and procedures are known by
different names such as vouching, posting, casting, tracing, balancing, calling over, etc. In
the following paragraphs, attempts will be made to explain the meaning and the
significance of these processes and the manner in which they are to be carried out.
At the outset it may be observed that routine checking will disclose merely clerical
errors and very simple frauds and will seldom, if ever, reveal errors of principle or clever
frauds. In order to discover these, the auditor must go behind the books of accounts,
examine the original records and make intelligent enquiries. In fact, he will be required to
trace the entries to their very source. He has always to remain watchful bearing in mind
the weak spots in the system of book keeping in respect of which errors or frauds are
61
likely to occur. This routine checking or “tick work” as it is sometimes referred to, is of
course, important and must be carried out thoroughly with care and diligence: but, unless
other higher and more important matters enumerated above have also been properly
attended to, only clerical errors are likely to be discovered. Routine checking is apt to
become monotonous and consequently is likely to be done in a mechanical fashion.
However, it is the very basis of audit and is required to be carried out thoroughly and
intelligently. This part of audit mostly devolves on junior members of the staff. They
should be encouraged to think out for themselves and understand exactly what part of the
checking they are doing, plays in the whole plan of audit, what are the likely frauds or
errors that might take place and how they could be detected by their checking. In this way,
the work will become quite interesting and an intelligent junior will soon be able to grasp
the entire principles of practical auditing.
Some of the frauds that can be found out by the routine checking are detailed
below.
A) Cash: While checking totalling the Cash in inner column less credited can be searched
out, as well as the credit side total will revel the short credit and at debit side the excess
debited cash will be find out. Totalling of cash receipt at inner side of cashbook and
receipt would be revelled for short credit of cash. The total of vouchers at inner side of
debit side of cashbook will show the excess debited cash in cashbook
B) Stock: totalling of stock register will understated for purchases and overstated for sales
, however, the amount does not with commensurate with the quantity and amount. The
totals of sale register are under stated by which the amount of sale is not properly credited,
and amount is misappropriated.
C) Legers: The personal ledger is credited for sum received, however the same amount is
not credited to the cashbook. And the General ledgers is over or under summed for
cancellations of entries that are passed in personal ledgers, and not credited to cashbook .
Most professional auditors are now of the opinion that in the past far too great proportion
of time was devoted to detailed checking. The modern view is that an audit is made much
more effective by devoting a greater proportion of time to the more advanced part of the
audit programme in case of bigger institutions. It has also to be remembered that if the
auditor confines himself to the entries as they appear in the books and does not go deep
enough, his information will be incomplete and he may pass over matters of importance
which affect the accounts materially.
3. Vouching: The term “ vouching” is used to describe the examination of a document or

a series of documents for the purpose of verifying a transaction which is recorded in the
book and in appropriate cases ensuring that the system of internal control relating to the
transaction has been duly followed. Vouching is the very essence of auditing and the whole
success of an audit depends upon this intelligence and thoroughness with which this part
of audit work is carried out. It has , however, to be understood that vouching does not
mean merely comparing receipts and vouchers with the cashbook. During the course of
vouching, the auditor has to examine a whole set of documents such as receipts , vouchers,
bills, invoices, statements of accounts, minutes of meetings and such other documents on
the basis of which the entries in the cashbook and other books of prime entry have been
made. A careful comparison of the entries in the cashbook, journal and other books of
prime entry with the supporting documents would ensure:-
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As regards receipt:-
(i) that all moneys due to or receivable by the business have been duly brought into
account and there has been no impropriety or irregularity in the realisation of moneys due
to the business.
(ii) All moneys received by the business have been properly accounted for and
credited to their proper heads of account.
As regards payment:-
(iii) that all payments made and liabilities incurred are regular, properly authorised and
payable out of the funds of the business and have been shown under correct heads of
accounts distinguishing between revenue and capital expenditure and in particular that the
expenditure incurred and liabilities contracted were necessary and incidental to the
business of the society.
(iv) No fraudulent or unauthorised payments have been debited which reduce the cash
balance of the and
(v) The daily closing balances have been correctly extracted and carried forward.
In the examination of transactions, it should be noted that neither the entries in the books
of account nor the documents from which the entries have been made are to be blindly
accepted at their face value, but have to be relied upon after applying due tests which are
described in detail in the following paragraphs. It is also necessary that the auditor should
apply to the audit his knowledge of the conditions, under which the society conducts its
business. Thus, for example, in agricultural credit societies, loans to members are to be
made only in accordance with the credits sanctioned to individual members in the Normal
Credit Statement / Kisan Credit Cards finally approved by the financing agency. In case of
marketing societies, period for payment of sale proceeds, scales of commission and
expenses and other matters are governed by the rules of the Market Committee or by
custom. In co-operative sugar factories, payment of cane prices and advances to members
and sales of sugar are regulated by policy decisions taken by the State and Central
Governments. It is , therefore, necessary that the auditor before commencement of his
audit should familiarise himself with:
(a) the nature of the business conducted by the society.
(b) The account books maintained and the method of bookkeeping adopted. And
(c) the system of internal control in force and the nature and extent of external
supervision and control over its operations.
4. Vouching of cash transactions-control over cash- Since a majority of frauds are in

connection with cash, it is important that an adequate and scientific system of internal
check should have been in operation as regards receipt and disbursement of cash,
remittances of cash and for the custody of the cash balance. Where cashier is appointed, he
alone should attend to the receipts and disbursement of cash and remittances to and from
bank and preparing cheques. The “Day Book” or the “ main Cashbook” should be written
by the accountant and not by the cashier who should be maintain only a rough cashbook or
cash diary and cash summary book.
5. Vouching of receipt- Internal control over receipts. - It has to be noted that vouching
receipts is always more difficult than vouching payment, since, in many case, no direct
evidence as regards regularity and correctness of the amount received, would be available.
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The system of internal check should be carefully enquired into and special attention should
be paid to any part that is considered inadequate.
To ensure proper control over receipts, the following arrangement are necessary:
(i) All incoming letter should be opened by the Manager or other responsible officer.
All cheques, drafts, postal orders, registered letters, etc. Should be specially crossed to the
Bank account and entered in a separate register along with other remittances in currency
notes and coins received under insured covers or by money orders before being passed on
to the cashier. At the close of the day, entries in this book should be compared with the
entries in the Cash Diary or Rough Cashbook maintained by the cashier.
(ii) All remittance should be invariably acknowledged. Specially printed receipt books
with duplicate serially numbered receipts to facilitate retention of the carbon copy in the
book itself, should have been issued for acknowledging all remittances whether received
in cash or by cheques, drafts or by money orders. Counterfoils are required to be written
up separately and it is likely that an unscrupulous employee might enter different amount
in the counter foil and the outer form. No acknowledgements should be made on the
invoices , bills, or statements issued to the customers. The employees should be strictly
forbidden acknowledging remittances on the ledger account of the society kept by the
customer or on the copy of the invoice or bill sent to him. This practice followed by some
the marketing societies, should be discouraged. Notice should be given to all members
and customers that no receipt would be valid unless issued from the printed receipt book
of the society and countersigned by the authorised person. All receipts in a receipt book
should have been pre-numbered and the serial numbers should be examined before a new
receipt book is brought into use.
(iii) Spoiled and cancelled receipts should not be destroyed , but should be pinned to
the carbon copy as evidence of what has taken place. Cancellation should be made under
initials of the officers authorised to sign the receipts. While checking receipts, it should be
seen that the serial numbers run consecutively and that no receipts are missing.
(iv) Where there is a system of issuing temporary or katcha receipts on plain paper or
recording acknowledgements on the books of the customer by recovery clerks, salesmen
or representatives, the constituents should have been duly notified that such receipts or
acknowledgements are merely temporary acknowledgements and that they must insist on
obtaining official receipts. The practice of issuing temporary receipts should be
discouraged. Wherever possible all temporary receipts should be called back at the time
of issue of the official receipts. Where necessary, specific mention should be made in the
official receipt about the cancellation of the “ katcha” or temporary receipt already issued
for the same remittance.
(v) Where remittances are received in cash, signature of the person paying in the
amount should be obtained on the receipt itself in the space provided for it or at the back
of the receipt as evidence of the delivery of the receipt.
(vi) Any material alteration in the receipt, if necessary, should be made only under
initials of the person or persons authorised to sign the receipts.
(vii) All unused receipt books should be kept in safe custody. An account of the receipt
books received from the Printing Press and issued should be maintained and a fresh book
should be issued only when the receipt book in use has been completely exhausted. When
different receipt books are simultaneously in use for acknowledging different classes of
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receipts or receipts under different heads, the receipt should be of different colours or sizes
so as to be easily distinguished.
(viii) The cashier should not be allowed to make any entry in the ledger and the ledger
clerk should not be allowed to handle cash.
(ix) In banks and other large concerns, all remittances are first entered in a scroll book
by a clerk before they are paid over the counter to the cashier. The scroll clerk examines
the chalans, paying in slips or other documents accompanying the remittance and makes
entries in his scroll book. At the close of the day, entries in the scroll book are called over
into the rough cashbook or cash diary maintained by the cashier which would ensure that
all remittances are properly accounted for.
(x) Cash ,cheques and other remittances received either by post or from cash sales
collections ,cash paid in by travelling salesman, recovery, clerks, etc. Cash remitted by
disbursing officers (employers) in case of salary earners’ societies and also canteen
takings, cash takings of milling or grinding charges in societies, running rice mills ,flour
mills and rendering other services should be banked intact daily except where the
collections are too small and allowed to accumulate until a substantial amount is
collected to justify remittance to bank .However as far as possible no payments should be
made out of cash takings.
6. Nature of documentary evidence available for checking receipts: Counterfoil or

carbon copies of receipts issued to the remitters should be available for checking the
following types of remittances:-
(i) Shares and entrance fees
(ii) Deposits (Except in banks where the persons paying the amounts are required to
prepare pay-in- slips or chalans explained in paragraph (3) above.
(iii) Miscellaneous receipts such as hire charges of machinery and equipment's , fees
and charges for services rendered, share transfer fees, copying charges, fees for issuing
duplicate documents, etc.
(iv) Repayment of loan by members, recovery of dues on account of credit sales and
other outstanding dues.
In an Institution doing banking business and also in some other institutions,
customers are required to fill in pay-in-slips or chalans for moneys paid by them.
Similarly, for issue of drafts or transfer of funds and also for payment of hundies and
release of railway receipts and other documents of title to goods, application forms which
furnish full particulars of the amounts paid, are required to be filled in by customers and
would be available to the auditor for his verifications. For such remittances, generally no
separate receipts are issued.
7. Method of checking receipts:- The entries in the cashbook should be compared with the
office copy of the receipt issued to the party and it should be seen that the following
particulars correspond:-
(1) Date of receipt
(2) Name of the person paying in the amount and name of the person on whom behalf
are remittance is made.
(3) The amount received should have been mentioned both in words and figures.
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(4) Mode of remittance if received by cheque, name of the bank on which drawn
should be specified. If received by money order, postal order, insured post etc., the mode
of receipt should be specified.
(5) Head to which credited: Carbon copies of the receipts issued to the remitter
retained in the Receipt Book only provides indirect evidence. There will also be different
types of documents, which will have to be examined for verifying certain types of receipts.
These will be discussed in the following paragraphs.
V-3 CHECKING OF DIFFERENT TYPES OF RECEIPTS
1. Share and entrance fees: Share certificates bearing distinctive numbers are required to
be issued for all shares subscribed. Counterfoils of share certificates issued will also be
available and information contained therein, will have to be checked with the entries in the
share register, share ledger and the members’ register. Byelaws of Cooperative Societies
generally provide that allotment of additional shares should be made by the committee.
Minutes of committee meetings will, therefore, have been seen.
Printed receipts are generally issued for acknowledging amounts received towards
shares and entrance fees paid by members and prospective members. Since entrance fees
and share money are required to be paid before admission to membership, pending
approval by the committee, of the application for membership, ordinarily, the amount
would be credited to a share suspense account in the first instance and subsequently
adjusted to the share and entrance fee accounts after the resolution admitting the applicant
to the membership of the society is passed. His name will thereafter be entered in the
member register.
2. Recovery of shares by instalments. - Except in case of co-operative sugar factories,

spinning mills, and a few other types of societies, where the value of a share has been kept
high, the full value of the share is recovered in one lump sum. As such, except in case of
the above types of societies, there is no system of making calls towards balance of share
money due from subscribers to share capital. In case of salary earners’ societies, monthly
subscriptions at rate specified in the Byelaws are collected from the members along with
other dues of the society and shares are allotted to them when the full amount of a share is
received. In consumers societies, rebate or purchase bonus payable to non-member
customers is also credited to their accounts and when the full amount of a share is
collected, they are enrolled as member and the undisbursed bonus payable to them is
credited to their share account.
3. Share Capital of newly registered societies: - Before a society is registered, the

promoters of the proposed society are required to collect deposits from the prospective
members towards initial share capital of the proposed society. No society is register until
initial share capital considered adequate by the registering authority is collected and paid
into the bank. The amounts collected from time to time by the promoters are required to be
deposited with the head office or nearest branch of the district central bank of the district
and Maharashtra state cooperative bank in Mumbai, or Urban Cooperative Bank or Postal
Savings bank. An account is opened in the name of the proposed society to be operated
jointly by the Chief Promoter and one or two other promoters. Not depositing the amount
in the said manner is offence under section 146(d) of the M. C. Societies Act, and
punishable for a fine of Rs. 5000 under Section 147(d) of the Act. No amount is normally
allowed to be withdrawn from this account until the society is registered and the account
transferred in the name of the registered society. If the society is not registered, the chief
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promoter can withdraw the amount only on production of a letter signed by the registering
authority stating that the society has not been registered and the promoters are permitted to
withdraw the amount and refund to the prospective members of the proposed society, the
initial capital contributed by them.
The newly registered society at its first general meeting is required to pass a
resolution intimating the Bank that the society has been registered and requesting that the
account opened in the name of the promoters should be transferred to the name of the
society. Copies of the resolution along with account opening form duly filled in and
signed by the authorised persons are sent to the bank. After the account is transferred in
the name of society the amounts paid in by the promoters and other applicants for
membership of the society are credited to their respective share accounts and the entrance
fee account
3-A) Treatment of Deemed members shares:- Section 23 1-A provides for deemed
membership. If the society refuses to accept the application from an eligible person for
admission as a member, or the payment made by him in respect of membership, such
person may tender an application in such form as may be prescribed together with
payment in respect of membership, if any to the Registrar. The Registrar shall forward the
application and the amount, if any so paid, to the society concerned within thirty days.
From the receipt of such application and the amount and thereupon, if the society fails to
communicate any decision to the applicant within sixty days from the date of receipt of
such application and amount by the society, the applicant shall be deemed to be member
of a such society. From this provision it is clear that, until the period of sixty days from the
receipt of amount and application he is not become the member of the society, during this
period the amount so deposited by the person shall be credited to the share suspense
account. After the completion of legal procedure if accepted by the society or become a
deemed member the amount of share suspense account should be transferred to the
respective entrance fees and Share Capital account.
4. Audit of accounts of societies prior to their registration: Promoters of cooperative

societies are required to maintain proper accounts of all amounts received and payments
made by them prior to the registration of the society. If the transactions prior to the
registration of the society merely relate to collection of share capital and incurring normal
expenditure for getting the society registered, such as expenditure over postage, reasonable
conveyance charges, printing of receipts and books, typing of Byelaws etc. They are
generally entered in the cashbook of society and should be checked by the auditor.
However, if the promoters have already started business in the name of society and
considerable period has elapsed before the society has been registered, the auditor should
obtain a statement of receipts and disbursement made by the promoters on behalf of the
society and the transactions should be checked and in detail. If the auditor is of opinion
that he will be required to spend considerable time over checking the transactions prior to
registration of the society, he should seek instructions from the Registrar whether the
accounts should be audited by him or the society should be asked to get the accounts
audited by a another auditor appointed by the society for this purpose. In either case, it
should be seen that the statement of Receipts and disbursement prepared by promoters
and duly signed by the Chief Promoter is considered and adopted at the First General
meeting of the society.
5. Checking of members register: Entries in the Members’ register will be checked with
applications for membership, resolutions of the committee and entries in the cashbook
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relating to receipt of entrance fee and share money. As regards deletion of names from the
Member’s register, remarks regarding cessation and also the date of cessation and reason
for deletion of name from membership should be recorded in the remarks column. If the
society does not comply to remove the name of the person who has ceased to be member,
the Registrar shall be competent to direct the society the name of such person and the
direction is binding on the Society, as per Section 25 A of the M.S.C. Act.
5-A) Refund of shares:

i) In case of resignation or transfer of entire shares holding, resolution of the
committee accepting the resignation and approving refund or transfer of the shares held
should be seen and it should be seen that the restrictive provision in the Act, rules and the
Byelaws regarding refund of share capital are duly observed. It should also be seen that
the resigning member has repaid all his outstanding dues to the society and has also
discharged his liability as surety. The main restrictions regards share refunds are
ii) The shares should be refunded at the value of the last years balance sheet as
certified by the auditor in his audit memo, however, the value of refunding share should
not exceeds the face value of the share. In other words the value is less than the face value
of share the less value should be refunded and if it more than the face value, the refund
should be restricted to the face value. This will not apply to the refund of shares by way of
transfer. (MCS Rule No. 23)
iii) In case of liquidation societies shares should not be adjusted through recovery dues
form the member. (MCS Rule No. 23)
iv) The limit of refund of share in the year in which refunded is 1/10th of the share
amount outstanding in the last year’s balance sheet. (MCS Rule No. 23)
v) The method of valuation of share : The method is prescribed in the Rule 23 as
“amount arrived at by a valuation of shares by dividing net worth of the society by number
of shares” this means the net worth of the society shall be calculated by the auditor and
then he has to arrive at the valuation of the share, and to see the refund of share is made
accordingly.
vi) Net worth: under the rule 23, explanation is given for net worth as, ‘ for the
purpose of this rule, net worth means paid up share capital plus free reserves ( Reserve
fund, unutilized building fund, dividend equalisation fund , carried forward balance of net
profit , any other fund which is not marked specifically for any liability) minus
accumulated losses.
vii) Calculation of Net Worth: from the above explanation the calculation of Net
worth can be arrived at as-
Sr. No. + or - Particulars of funds and capital Amount in Rs.
1 paid up share Capital
2 Free Reserves
a + Reserve Fund
b + Building fund – (Utilised portion of the building fund)
c + Dividend Equalisation fund
any other fund (which is not marked specifically for
d +
any liability.)
e + carried forward balance of net profit
f Total of a to e
Total Funds 9 (Total of 1+2)
3 - Accumulated losses
4 = Net worth
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viii) Free Reserves: Except the funds mentioned above in a, b, c, the other funds are
requires to be explained. Free reserves are those reserves which are created from the
distribution of net profit and having no charge on them. It explained in rule as ‘ which is
not marked specifically for any liability’. The auditor shall keep in mind while calculating
the net worth, free reserves shall comply two conditions, one that it shall be appropriated
from the net profit and another it shall not be created against any liability. Hence the
funds created for member welfare fund, employees welfare fund or such funds shall not
form the part of Net worth. As well as funds created from debiting profit and loss account
such as Bad and doubtful fund, investment fluctuation fund , Investment amortisation fund
and as such will not form part for calculation of the Net worth.
ix) Net worth by NABARD/ RBI _ For District Central Cooperative Banks, State
Cooperative Banks, and Urban cooperative Banks the inspectors of RBI/NABARD
calculates net worth according the provisions of the Banking Regulation Act 1948, is
explained elsewhere.
x) Another method of calculation of net worth: The net worth is concept wherein
as on a specific date the assets are realised at there releasable value, after paying all the
liabilities, the amount of balance is Net Worth. it can be calculated as given in the
following table.
Sr. + Amount
Particulars of Assets with there realisable value
No. or - in Rs.
Liquid Assets (Compromising of cash, bank balances, and
1 + investments for less than 1 years duration) - losses not provided
for on these assets
Current Assets (Compromising of stock in trade, vehicles, and
2 + assets which are of current assets nature) - losses not provided
for on these assets
Fixed assets ( Compromising of building, sheds, godowns, Plant
3 + and machinery, etc. attached to the earth) - losses not provided
for on these assets
4 Total of All Assets
+
5 All receivables – All payables
or -
6 Net of Assets (Net Worth) ( 4-5)
6. Admission of new member: points to be noted. - While checking applications for

membership, compliance by the prospective members of the requirements of the relevant
provisions of the Act, Rules and Byelaws of the society will, also have to be seen. Some of
them are mentioned below: -
1) Declaration in form ‘K’ to be furnished by applicants for admission to membership
of a credit society, who are members of more than one credit society specifying the society
from which alone they would borrow.
2) Declaration under section 48 to be furnished by members of agricultural credit,
multipurpose and service societies, creating charge on agricultural lands held by them, or
their interest in the lands cultivated by them in form ‘M’
3) Undertaking under Section 49 to be furnished by members of salary earners
societies, authorising their employees to deduct from their salaries or wages, dues of the
society as communicated by the society.
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4) Undertaking to be furnished by members of cooperative farming societies

authorising the society to borrow on moneys on the security of lands pooled by them.
5) Undertakings furnished by members of co-operative sugar factories, spinning
mills, ginning and pressing factories, oil mills, rice mills and other processing societies to
deliver to the society their entire sugarcane, cotton, groundnut, etc. Grown by them.
6) Declarations furnished by members of housing societies regarding buildings plots,
houses, or tenements already owned by them
Compliance of the provisions of the Byelaws regarding purchase of shares in
proportion to acreage under specified crops held, loans borrowed, cost of tenements to be
constructed, etc. will also have to be seen.
7. Receipt of Government share capital, loan and subsidy: Receipt of Government share
capital- this has been dealt with separately elsewhere.
As regards receipt of Government loan and subsidy, copy of the order sanctioning
the loan or subsidy should be inspected and it should be seen that the terms and
conditions subject to which the loan/subsidy has been sanctioned are duly complied with.
The auditor, during the course of his audit, should watch over the proper utilization of the
loan and / or subsidy and point out in his report non-compliance of any of the conditions
Joint Registrar, District Deputy Registrars and other officers sanctioning loans and
subsidies are directed by the Registrar to forward to the auditor concerned a copy of their
order sanctioning loan and / or subsidy. (Registrar’s circular NO. ADM-6/20-ADT, dated
10.8.69). Where loans and subsidies are sanctioned by other Department of Government
(Industries Department, Fisheries Department, Social Welfare Department, etc.) Or by the
Central Government or other authorities (NCDC), Maharashtra Small Industries
Development Corporation, Finance Corporation etc. The Divisional Joint Registrar or the
District Deputy Registrar to whom a copy of the order sanctioning the loan or subsidy is
addressed should invariably supply a copy of the order to the auditor concerned to enable
him to note compliance of the conditions of the loan or subsidy. Even though the auditor
receives no copy, he should ascertain the terms and conditions from the copy of the order
received by the society and point out non-compliance of any of the conditions, if noticed
by him.
Institutions acquiring permanent and semi - permanent assets wholly or mainly out
of grant- in-aid received from the state or central government, are required to maintain a
register of such assets in the form prescribed by Govt. in Government Resolution, Finance
Department, No. G. I. A. /7161/7942-VII, dated 18-6-1962. They are also required to
furnish an undertaking to the sanctioning authority not to dispose of, encumber or utilise
for other purpose such assets without prior concurrence of Government. Auditors during
the course of their audit should verify the proper maintenance of the prescribed register
and also see that the condition laid down are adhered to by the grantee institutions.
(Registrar’s circular No. SBY/ACT , dated 3-10-1962 )
8. Accounting of subsidies granted by Government - Subsidies granted by Govt. towards

capital cost of the scheme should invariably taken to the reserve fund of society. Subsidies
received towards secretarial cost or other management expenses may be taken to profits
except cases where specific instructions are to be given for its treatment. Where any
conditions are have been laid down or special instructions are have been issued by the
Registrar for the utilisation of Govt. Assistance, it should be seen that these condition or
instructions are complied with.
In case of co-operative consumer societies, special instructions have been issued
for the accountings of subsidies vide circular No. E/cons/FA/ACT dated 29 -1- 72. The
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circular lays down that if there are adequate profits to enable the society to declare the
dividend, the amount of subsidy received should be directly credited to Reserve Fund and
is not available for distribution as dividend.
Subsidies granted by Govt towards capital cost of a scheme, should invariably be
taken to the Reserve Fund of society.
Under Govt Resolution, Finance Department, No. CIA/7161/7942-VII dated 18-6-
1962, all societies receiving grants -in-aid required to furnish an undertaking agreeing to
abide by the conditions attached to the grant -in-aid. The grantee institutions are also
required to maintain a register, in the proforma, prescribed by Govt., of permanent or semi
permanent assets acquired wholly or mainly out of Govt grants and not to dispose of
encumber, or utilise them for other purpose without prior concurrence of Govt.
In case of certain type of institutions like fishery societies, dairy societies and other
societies, which receive loan or subsidy under special scheme of development of these
societies and providing them financial assistance, the orders of Govt. Sanctioning the loan
or subsidy contain specific instructions as regards treatment in accounts of subsidies
granted to them. The provisions of these orders should be carefully studied by the auditors
and their compliance noted.
9. Indian Accounting Standard for Government Grants: The Institute of Chartered

Accounts of India has issued a accounting standard AS 12 on accounting of the
Government grants which is described below.
1) Government grants should included in accounts on after receipt of them and no
accrual basis should be adopted.
2) Government grants received for acquiring specific purpose should be treated in the
following manner.
2-a) The grants may be shown in the balance sheet as a deduction from the gross value
of the relevant fixed asset (It may be noted that this method is also in conformity with the
provisions of the Income tax Act 1961)
2-b) Secondly, the original total cost and the related depreciation may be left
undisturbed and the grant treated as deferred income which should be recognised in the
profit and loss statement by allocating the income over the periods and in proportions in
which depreciation on the asset concerned is charge. If however, the grant relates to t non-
depreciable asset, it should be credited to capital reserve under this method except where
the grant relating to non-depreciable asset, it should be requires the fulfilment of certain
obligation. In the latter case, the grant should be credited to income over the same period
over which the cost of meeting such obligations is charged to income. The deferred
income balance should be disclosed separately in the balance sheet.
3) Sometime, a grant or subsidy is given as a compensation for the extra costs
associated with the operations on a systematic basis in the profit and loss statement over
periods necessary to match them with the related costs, which they are intended. Such
grants should either be shown separately under “other income” or deducted in reporting
the related expense.
4) Sometime, government grants have the characteristics similar to those of
promoters’ contribution. For example, grants may be given with reference to the total
investment in an undertaking or by way of contribution toward its total capital outlay (as
in the case of Central Investment subsidy scheme). Such grants should be credited to
capital reserve and treated as part of shareholders’ fund.
5) Government grants in the form of non-monetary assets, given at a concessional
rate, should be accounted for on the basis of their acquisition cost. In case a non-monetary,
asset is given free of cost, it should be recorded at a nominal value.
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6) Government grants that are receivable as compensation for expenses or losses

incurred in a previous accounting period or for the purpose of giving immediate financial
support to the enterprise with no further related costs, should be recognised in the profit
and loss statement of the period in which they are receivable and disclosed as an
extraordinary item, if appropriate.
7) In case of government grants become refundable, the resultant debit should first be
adjusted with reference to the relevant item in the balance sheet, e.g., in the case of a
refund of a grants in the nature of the promoters’ contribution, the refund should be set off
against the capital reserve. The balance, which cannot be so adjusted, should be charged to
the profit and loss account
8) The following should be disclosed.
A) The accounting policy adopted for government grants, including the method of
presentation in the financial statement.
B) The nature and extent of government grants recognised in the financial statement,
including grants of non-monetary asset given at a concessional rate or free of cost.
10. Related provisions of Cooperative Societies Act related to Government grants:

Section 62 describes various aids given to Cooperative Societies such as
1) loans
2) Guarantee for payment of principal of debentures issued by the society
3) guarantee for repayment of loans given by a bank to the society.
4) Guarantee for repayment of principal and interest for loans and advances given by
the RBI /NABARD /IFCI or other financial Institute
5) financial assistance, in other form (including subsidies).
For state partnership to societies towards share capital is covered under section 51
to 60 of the act. Which is described elsewhere.
The major kinds of subsidies provided by the department are managerial subsidy
for tribal vivid karykari societies, which is compensation of their expenses for
management. Loans are sanctioned with some subsidy to various types of societies, for
construction of godowns, storages facility, and for other purposes.
Auditors should observe the terms and conditions of sanction order, and
accordingly the accounting policy has been opted by the society or not.
11. Deposits- For fixed and call deposits, printed receipts from counterfoil receipts books
specifying the terms and conditions of the deposits such as rate of interest, period, due date
etc., are issued to depositors. Counter- foils of the receipts and retained in the receipt book
should be compared with the entries in the cashbook and the Fixed Deposits Register.
In Co-operative Banks and societies accepting saving deposits, pay- in -slips or
chalans, as they are called, which are filled in by the remitters, would be available for
amounts credited to their respective accounts. The Reserve Bank of India has issued
various guidelines for accepting the deposits, their repayment, opening of accounts, their
renewal, premature repayment, are described in another chapter in this manual elsewhere.
12. Receipts of loans from central banks and other financing agency -- Receipts of bank
loans will be checked with the advice of the bank and correspondence with the bank
regarding sanction of the loan and entry in passbook crediting the proceeds of loans.
Duplicate copy of loan bond or agreement and promissory note copies of the application
for loan and resolution of the committee on the record of the society should also be seen.
The auditor should verify the terms and conditions laid down by the central financing
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agency for repayment of loan, rate of interest, verification of assets created from the loan,
insurance required to be taken, mortgage of property deeds and other relevant records.
13. Repayment of loans by members: For acknowledging repayment of loans (principal /

interest and other expenses) made by member, printed receipt from the official receipt
book are generally issued. Entries in the cashbook should be checked with the carbon
copies of the receipts contained in the receipt book. Passbooks are also issued to
borrowers. During the course of audit, a certain number of pass books should be called and
compared with the account in the ledger
14. Special Receipts: Sale proceeds of Government securities and other investments:
since purchases and sales of Government securities and other investments are made
through broker or bank, broker’ “sold notes” or “bankers’ memoranda would be available
for checking the correctness of the amounts received. The Reserve Bank of India has
issued detailed instructions regarding sale purchases of Govt. Securities in his circulars,
the details of these circulars is given in Urban Banks and DCC Banks section of this
manual. Auditors are required to study this circulars carefully and verify the securities
transactions, its valuation method, auditing procedure and its reporting method,
CSGL/SGL accounts, limitations with business through brokers, etc. It will have to be
seen that necessary adjustments are made for interest and premium amounts included in
sale and purchase transactions and verify them accordingly. The Reserve Bank of India
issues master circular on 1st July of every year regarding different aspects of banking
business. The auditor should see that the banks have complied with such circulars. These
master circulars are available on Reserve Bank of India’s website i.e. www.rbi.org.in
15. Capital Receipts: Sale of immovable property and other fixed assets. Resolution of
the committee / Board will have to be seen for agreement of the sale. If sales were made
by private negotiations, the agreement for the sale and the sale deed and other
correspondence would be available for ascertaining the price realised. If sold by public
auction, the auctioneer's report would be available. Where fixed assets are disposed of, it
is the duty of the auditor to see by reference to the sale agreement and other
correspondence that the prices realised are reasonable. It has also to be noted that under
Rule 57((1) (b) of the MSC Rules, no officer of the society can have any interest directly
or indirectly in any property sold or purchased by the society. (Indian Accounting
Standard AS 10)
16. Disposal of fixed assets: Sales or scrapings of fixed assets should be authorised by the
committee or by a responsible officer. Where fixed assets are sold or scraped, the value of
which they are shown in the books should be alienated from balance sheet. Where a
register of a fixed assets is maintained, the accumulated depreciation pertaining to the
items disposed of should be ascertained and written off against the original cost of the
items and the remaining net book value, if any, should be charged against the proceeds of
the sale. If the sale proceeds received are in excess of the net book value of the assets
shown in the balance sheet, the surplus should not be taken to the profit and loss account,
but, should be credited to a “special capital reserve “ or similar other fund. Any deficit
remaining after adjusting the sale proceeds against the net book valued should be written
off against the profit and loss account. (Indian Accounting Standard AS 10) The profits or
losses incurred on disposal of the fixed assets should be clearly disclosed in the accounts.
Where fixed assets are disposed off, it is the duty of the auditor to see by a reference to the
sale agreement and other correspondence that the prices realised, are reasonable. This
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should be particularly seen when fixed assets are sold to parties who occupy a fiduciary
position as regards the society. Thus, for example, where a motorcar is sold to a relative or
friend of a director or an employee of the society and the price released is below the
market rate, further investigation is called for.
17. Replacement of Machinery: In Processing societies like Sugar Factories, Spinning

mills, the machinery is partly replaced. While recording the transactions of purchase the
auditor should verify that the machinery replaced is properly capitalised and the replaced
machinery with its scrap value is properly charged to the fixed assets account and delated
from it in the balance sheet and recorded in the machinery register. (Indian Accounting
Standard AS 10)
18. Income received- Cash sales: - Cash memos, showing particulars of goods sold such
as quantity rate, etc., and amounts received would be available for checking cash sales
entered in the Daily Sales Register. The procedure for checking cash sales has been
discussed elsewhere.
19. Interest Received on loans and advances: Interest received on loans and advances to
members will be checked from the printed receipts issued to them. Interest calculation will
have to be checked while checking posting into the loan ledger. The quantum of checking
will be according to instruction issued by the Department in this behalf.
20. Interest received- Interest received in amounts deposited with bank will be checked
from the entries in the passbook. As regards interest on fixed deposits with bank and other
investment, since the rates can be ascertained from the deposit receipts and the securities,
the amount of interest received can be verified by checking the calculations on the
amounts of the deposits or the nominal value of the securities. In case of dividend on
shares, the counterfoils of the dividend on warrants will have to be seen. Where the
number of investments is large, it will be convenient to have a separate investment
Register, or ledger. At the top of each account, a full description of the investment should
be given together with the date or dates on which the interest or dividend falls due.
21. Rents received from properties: Agreements executed by tenants should be seen. It
should be seen that all rent received has been duly brought into account and received.
Enquiries should be made into arrears and action taken for recovery should be ascertained.
Housing societies, Industrial estates and other societies, which hold large properties,
should maintain a “property Register” prescribed in the form X-1 under Rule 65. It is also
necessary to maintain a register showing full particulars of the tenement, names of tenants
to whom they have been let out and the monthly rent, compensation, service charges and
other charges recoverable from them. The registrar has prescribed various rates and issued
instructions regards service charges to be charged and recovered in respect of housing
societies, auditor are required to study these circulars and verify accordingly. Non
occupancy charges on service charges are fixed by the Government by its No. Cooperation
and Textile / sagruyo/ 1094/15165/ pra kra/ 317 14-C dated 1.8.2001.A “Demand
Register” showing current demand and arrears of previous month, amounts collected and
balance due should also be maintained. Receipts issued to the tenants should be traced to
the Rent Register. Enquiries should be made into arrears outstanding for a long time and
action taken for recovery ascertained. Similarly, where properties or tenements are shown
as assets, enquiries should be made as to why and how long they are vacant.
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22. Hire charges of trucks, tractors and other vehicles and machines: - Societies which
own trucks, tractors and other costly machinery and equipment are required to maintain
log books for each transport vehicle or other machinery owned by them showing
particulars of the journeys performed, works or jobs executed or other services rendered.
Where these are hired out to member, applications should be obtained from the hirers
regarding the nature of service required or job to be executed, period for which the
transport vehicle or other equipment would be required, etc. Rates of hire charges should
be fixed by the committee. A hire register is required to be maintained and printed receipts
are required to be issued for hire charges received. Where the number of such vehicles or
machinery is large, daily reports should be obtained from the officer-in-charge.
23. Miscellaneous Receipts Occasional receipts such as sale proceeds of fixed assets,
scraps, unused stores and spare parts, discarded material, waste papers, etc., and also
receipts from insurance companies and from railways in respect of claims, should be
vouched from the receipts issued, correspondence, minutes and relevant documents.
V-4 VOUCHING PAYMENTS:
1. General considerations: It is the duty of the auditor to see that all payments made are
genuine, correct, duly authorised and properly payable out of the funds of the society. In
order to satisfy himself on these points, he has to examine the entry in the cashbook and
compare it with whatever documentary evidence is available in support of the payment
made. The most important document is the voucher, which not only contains the
acknowledgement of the payee receiving the amount, but also other evidence which
should satisfy the auditor about the regularity, correctness and propriety of the payment
made. Since most of the frauds perpetrated in cooperative societies are connected with
cash and commonest method adopted by the culprit to conceal the fraud or
misappropriation committed by him, is to keep on record a bogus or fabricated document
as voucher, this part of routine checking viz. Vouching debit side of the cashbook has to
be done very carefully.
In addition to the regular voucher containing acknowledgement of the payee, the
auditor will have to examine a number of other document, minutes, notes, memoranda,
correspondence etc., which are known as supporting documents. It has to be noted that for
checking different types of payments, different types of document, such as official receipts
issued by the payee, acquittance on payrolls or payment registers, debit slips, receipted
chalans, counterfoils of pay-in-slips, debit notes, advices etc., would be available. It is,
therefore, necessary that the auditor before commencing vouching should familiarise
himself with the nature of the supporting evidence that would be available to him and the
type of document that he will have to examine which, as we know, would be different
according to the nature of the transaction and the practice followed by the business.
2. Control over payments - Payment by cheque all payments other than those made out of
petty cash should have been made by cheques. Where no petty cash is maintained
separately, a maximum limit for payment in cash should be fixed. Byelaws of some of the
societies specify that all payments in excess of a specific amount should be made by
cheques. Where there is no provision in the Byelaws, the auditor should insist that the
management should pass a resolution prescribing a limit for payments to be made in cash.
Where large payments are made in cash, reasons therefore should be ascertained. It has to
be noted in this connection that Rule 107 D of the MSC Rules lays down that all payments
should be made by cheque as provision of the Income Tax Act 1961. The Income Tax Act
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also provides the limit of Rs. 20000 for cash payment, laying some exceptions. The
auditor should study this provision carefully.
Cheques should only be drawn against properly authenticated documents, which
should be presented to the officers who are authorised to sign them along with the
cheques. These supporting documents may be invoices, payrolls, bills, etc., duly checked
and passed for payment or reimbursement of patty cash or may consist of other evidence
such as requisition for issue of cheques, a remittance, advices, etc., which contain
necessary evidence that, the payments are to be made in respect of transactions which have
been checked with the relevant documents and the payment duly sanctioned.
In case of very large societies, which have set up a separate “Accounts
Department”, officer, who are authorised to sign cheques, should be different from those
who have approved the voucher for payment. The clerk who prepares cheques should not
have taken part in the approval of the voucher.
Before signing the cheques, the officers signing the cheques should see by reference
to the supporting documents that the cheques are made out in the name of correct payee.
All cheques should be crossed “ Accounts Payee”, “ Not negotiable”. Under no
circumstance, bearer cheques should be issued. Banks generally supply chequebooks,
containing cheques with printed crossing when demanded. Where the cheques is required
to be signed by two officer, signature of one of the signatories, mostly honorary office
bears, viz. Chairman, Treasurer or other committee member, is obtained in advance on a
number of blank cheques under the plea that he may not be available when urgent
payments are to be made. This practice is fraught with danger and the auditor should bring
this pointedly to the notice of the Committee. When two or more cheques books are
simultaneously in use, there issue should be properly controlled and all number should be
accounted for. This is ensured by maintaining a “ Cheque Issue Register” in which all
cheques are entered before they are put up for signature. All supporting documents,
accompanying the cheques should be cancelled either at the time of signing or after issue
of the cheques. This may done by means of a special “Paid” rubber stamp which should
also have a provision for entering the date of payment and the cheque number.
As for as possible, payments should be made in full and promptly so as to avail of
the cash discounts admissible. Where part payments or payments on accounts are made,
enquiries should be made as to why payments are not made in full. It should be noted that
part payment on account affords opportunities for errors and frauds. The auditor should
note that, the cheques above Rs. 50000/- are required to be quoted with PAN number of
concern persons, receiving the cheque, by way of crossed or transfer by NFTS. RTGS
system of payment through banks.
3. Nature of documentary evidence available- In vouching payments, acknowledgments

of the payees and other documents containing evidence of payment will be available.
However, in order to be satisfied about the priority, authenticity and correctness of the
payment made, a number of supporting documents like bill, invoices, statements of
accounts, etc., and also entries in other books and registers and minutes, correspondence
and other papers will also have to be seen. Thus, although the official receipt issued by the
payee would be sufficient evidence of the genuineness of the payment made, still, in order
to ascertain the propriety and correctness of the amounts paid, the transactions will have to
be traced back to its source. Thus, in the case of payment for purchases, it will be
necessary to commence from the issue of purchase order, issued to the supplier. In the
course of such an examination, which is known in the professional auditors as “
examination in depth”, a whole series of document, such delivery chalans, goods inward
notes, inspection reports, suppliers’ invoices, goods returned notes, statement of accounts,
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credit notes, etc., will have to be carefully examined in an orderly sequence. This process
of “ auditing in depth” will have to carried out in respect of as many transactions as
possible.
4. Checking payments: points to be noted - The following points are required to be borne
in mind while vouching the payment side of the cashbook
(i) The voucher should have been addressed to the society itself and not in the individual
name of the managing director, chairman, secretary or other officer. The nature of the
transaction to which it relates should be one, which the society can be normally
expected to carry on. For example, a society engaged in supplying seeds and manure’s is
not expected to buy jewellery or cloth.
(ii) Where it is known as official receipts, i.e. printed receipts bearing the name of payee
are generally issued for acknowledging remittances; no other receipts or
acknowledgement should be accepted as sufficient evidence of payment made.
(iii) All vouchers should have been properly authenticated by the authorised officers of
the society. This may be done by them either signing the original vouchers or preparing
home vouchers, which should have an approval column. This will ensure genuineness of
the vouchers produced for audit
(iv) Where actual payment has been made to a person than the payee himself, a letter of
authority from the payee authorising the person to receive the payment on his behalf
should have been obtained.
(v) When payment has been made to a person in his official capacity, it should be seen
that rubber stamp of the institution showing the designation of the officer is duly affixed
below the signature of the officer
(vi) If the signature of the payee is not in English or in a language known to the auditor, it
should have been translated into English or the language known to the auditor. All thumb
impressions should have been properly described and attested.
(vii) Where the amount paid is in excess of Rs. 5000 the voucher should have been duly
stamped.
(viii) Where the large amounts are paid in cash, the payment should be witnessed and the
payee properly identified.
(ix) The vouchers should have been properly checked as regards the arithmetical
accuracy of the amount and the propriety of the payment by the chief accountant or
other responsible officer of society. All usual discounts and special discount agreed upon
should have been deducted.
(x) All vouchers should be cancelled by the auditor as soon as he checks them and pass
the entries in his audit in order to prevent their production once again in support of a
subsequent fraudulent or fictitious payment. Either a rubber stamp bearing his name
should be used for the purpose or voucher should be initialled by the auditor in a
prominent place, preferably in the middle.
5. Sanction for payments: It is necessary that all payments should have been regularly
sanctioned by the committees or an officer properly authorised to do so, such as
Secretary, Manager, Managing Director, etc. Where the Secretary, Manager or other
officer has been authorised to sanction payments, it should be seen that the extent of the
authority has been fixed and that he has not exceeded his authority.
In order to be satisfied that all payments have been properly sanctioned, orders of
the Chairman, Managing Director, Manager or other responsible officer, competent to
sanction payments should be seen. Where the Managing Director, Manager or Secretary is
authorised to sanction payments or incur expenditure, it should be seen that these officers
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do not exceed their authority. Resolution of the Managing Committee, Board of Directors
or of the general body will have to be seen in case of payment, which are beyond the
powers of the Chairman, Managing Director, or other officers. All extra ordinary expenses
and expenses which are not incidental to the business of the concern or connected with any
of its activities, should have been sanctioned by the general body. Even in such cases,
their legality and propriety will have to be further examined. Similarly, all purchases of
immovable property and investment of funds outside the business of the society, which
the Board/Committee is not competent to sanction, should have been sanctioned by the
general body.
Where the Secretary, Managing Director or the Manager is authorised to incur the
expenditure or disburse amount upto a specified limit, all expenditure incurred by him and
all disbursements made by him should be placed before the committee or Board
periodically and its approval should be obtained.
6. Petty Cashbook: Control over petty cash: - For recording small payments made in cash,
it is convenient to maintain a petty cashbook. Only payments upto a specified limit should
be made from petty cash and all payments exceeding the amount should be made; by
cheque.
Petty cash should be kept on the imprest system and the fixed float with the petty
cashier should normally cover his payments for a period of fortnight or one month. The
petty cashbook along with the vouchers should be produced to the officers authorised to
issue cheques for reimbursement by way of a fresh cheque. He should sign the petty
cashbook as evidence of having checked and approved the payments made. This
arrangement provides an automatic and regular scrutiny of the petty cash expenses every
time a reimbursement check is signed. It will also render difficult any manipulation of
accounts or entering of fictitious or double payment by the petty cashier.
For all payments made from petty cash, proper vouchers should be obtained. These
should be duly cancelled at the time of reimbursement of petty cash so as to prevent their
further production in support of a fictitious payment. All vouchers should be serially
numbers at the time they are recorded in the petty cashbook. All supporting documents
such as bill, sub-voucher, cash memos, etc., should have been attached to the debit slip or
home voucher.
The petty cash balance should be kept as low as possible. I owe you (I.O.U.) or
unauthorised petty advances with or without vouchers should not be made from petty cash.
The petty cashbook should be regularly examined and surprise verification of the cash
balance made by a senior officer at frequent but regular intervals. The only receipts
entered in the petty cashbook should be proceeds of cheques cashed for petty cash
purposes. The method applied as already stated for reimbursement should be that of the
imprest system, with the amount of the float being specified by a resolution of the
committee. Where employees are allowed to cash cheques, limits upto which cheques can
be cashed by them should be laid down.
7. Method of checking petty cashbook- (1) Cheques from the cashbook to the petty
cashbook should be checked and it should be verified that all cheques drawn for petty cash
have been entered in the petty cashbook.
(2) Payment voucher should be checked and list prepared of all missing vouchers. All
petty cash payments should have been properly authorised,
(3) Totals and cross totals of the petty cashbook should be checked. Totals of the
different columns should be called over into the main cashbook. It should be seen that
proper double entry system is being operated with an imprest as the balance.
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(4) Where no contra entries are passed in the main cashbook (or the daybook) postings
into the general ledger should be seen.
8. Payment of advances: Advances are required to be made to the members of the staff
and officers of the society for various purposes, such as for making purchases or payments
to be made to creditors, for meeting expenses connected with purchases and also for
meeting their personal expenses such as travelling expenses, conveyance charges, etc.
Many time, advance payments have to be made or deposits kept for purchases or for
services to be rendered. Advances are also required to be made against works to be
executed or supplies to be made etc. There can be no objection for payment of such
advances provided the purpose is genuine, and payment of advances is necessary in the
normal course of business of the society. The reasons for the payments of advances or the
purpose, for which the advance has been paid, should have been specifically mentioned
in the body of the voucher and the advances should have been adjusted within a
reasonable time. Thus, if advances are taken for making purchases or for meeting
travelling and other expenses they should be cleared as soon as the officer returns to
headquarters. Where advances have been made against supplies to be received or services
to be rendered or against running bill, these should have been adjusted in the invoices or
final bills. However, where advances have been given for no specific purpose or
consideration, they should be objected to and where such advances are subsequently
credited back in cash. After some time, it should be noted, that this would amount to
misapplication of funds of the society. All such misuse of the funds of the society by its
office-bearers by taking unauthorised advances themselves or giving advances to other
persons, should be pointed out by the auditors.
A list of all outstanding advances on the date of audit should be obtained and it
should be seen that only temporary advances recently granted for specific purposes are
outstanding. Where advances have been outstanding for a long time, the reasons for not
recovering the advances or adjusting them should be ascertained.
9.Anamat or Tasalmat: In some societies the advances are paid in the name of “Anamat”
or “Tasalmat”, the auditor should check these anamats as stated in the above said
paragraphs. In some societies the anamats are credited for fictitious payments made, as
there is no cash balance in cashbook to pay the expenses, which are in the nature of
fictitious. Such entries are required to check very carefully by the auditor.
10. Procedure for checking payment voucher- While examining the documentary
evidence in support of a transaction, the auditor should satisfy himself that the system of
internal control in the business provides for such evidence to be properly checked before
presenting it to the official approving the transaction. The transaction should have been
properly authorised in accordance with the system of internal control. Thus, for example
purchases should have been made against orders for supply of goods signed by a
responsible officer. The terms of the transaction should also be prima facie reasonable. For
example purchase or sale of a motorcar at a figure well above or below the market price
should put the auditor on further inquiry.
While examining documentary evidence in support of a transaction. Particulars
entered in the cashbook and those mentioned in the body of the voucher or other document
should correspond in respect of the following: -
(i) Date of payment
(ii) Name of the payee
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(iii) Name of the person receiving payment on behalf of the payee, in case the payment is
made to a person other than the payee against his letter of authority.
(iv) Supporting documents like invoices, statements of accounts, cash memos, bill for
expenses, service charges, etc., should have been attached to the voucher or reference to
such document made therein.
(v) Amount paid should have been mentioned both in figures and words.
(vi) Head of the account to which debited. If the amount paid has been debited under
different heads of account, an analysis should have been prepared. This should be checked
by the auditor and the total agreed.
(vii) Mode of payment- Whether the payment has been made in cash or by cheque or
whether the amount has been remitted to the payee by bank draft postal order, National
Electronic Funds Transfer System (NEFTS), Real Time Gross Settlement System (RTGS),
money order or insured post or the payee’s account with the society has been credited and
a credit note issued in his favour.
Besides comparing the particulars entered in the cashbook and those mentioned in
the voucher, the following additional points will have to be examined.
(a) Signature or thumb impression of the payee or the person authorised to receive
payment on his behalf and the letter of authority of the payee.
(b) Whether the voucher is duly stamped in cases of where the amount exceeds Rs. 5000
and is free from other defects such as want of authority to receive payment, want of
sanction, irregular payment etc.
(c) Whether the voucher has been properly checked and payments authorised by a
competent authority.
11. Notes to be taken of usual and irregular items. - While checking voucher, careful
notes should be taken of all unusual items or items requiring further clarification or
explanation and also of items which call for additional information or authority or where
further evidence such as inspection of the minutes, contracts, lease-deeds, agreements,
orders, etc., is necessary. Notes should also be taken of all payments, which required to be
apportioned or adjusted. A list of all missing vouchers should be drawn up and
explanation as to the circumstances of their loss or non-availability of reasons for
failure to obtain regular vouchers at the time of making payments should be ascertained.
All subsidiary evidence in support of the payment, such as entry in the statement of
accounts confirmed by the party, reference in correspondence etc., should be seen with a
view to be satisfied about its genuineness and correctness. In a number of cases, it will be
noticed that only the debit slips or “home voucher” have been kept on record without the
payment having been actually acknowledged by the payee. Sometime, it might be
explained that the amounts have been merely adjusted or credited to the payee’s account
and, hence, no regular voucher was necessary. The auditor should carefully examine all
such contra entries and insist that in all case, payee’s acknowledgements should be
obtained. There are instances to creating bogus liabilities, by making adjusting entries in
book of accounts and then after paying it in cash, which result in misappropriation of the
funds of the society. Hence, the auditors should have to verify mare entries without
supporting vouchers, and take note accordingly, also call explanations and supporting
documents to avoid misappropriations and verification of genuineness and correctness of
the transactions.
12. Vouching different types of payment. - The more important types of payments that are
ordinarily met with in cooperative are discussed below: -
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Refund of shares: Refund of shares has to be made as provided for in the Byelaws of the
society. It has to be seen that the conditions prescribed in sub-section (3) of Section 29 of
the MSC Act and Byelaws of the society have been duly fulfilled. Where shares are to be
refunded, the share certificates issued to the member should be called back, duly cancelled
and attached to the voucher itself or kept in a separate file, unless it is intended to reissue
the shares or transfer them to other allottees. Resignations submitted by the member and
resolutions of the committee accepting the resignation and sanctioning refund of the share
capital should be seen. Remarks about the cancellation of the share certificates should also
be made on the counterfoils and also in the share register and the members’ register
(Section 25 A of M.S.C. Act).
In case of the societies which value of share is less than the face value, the auditors
should check that the value refunded accordingly the value assessed by the auditor in the
last audit report. The method of valuation of share should be based on the net realisable
assets of the society, is explained earlier in this manual.
Refund of fixed deposit: The original fixed deposit receipts should have been called back
and got discharged. In cases where no separate receipts are issued for fixed deposits, the
original receipts issued for the deposits should be called back and a separate voucher
obtained from the depositor for refund of the amount of the deposit and payment of
interest thereon. The original deposit receipt called back from the depositor dully
cancelled should be kept attached to the voucher. The RBI has issued detail guidelines in
her various circulars regarding care to taken while refunding fixed deposits which is
explained elsewhere in this manual. Auditors should have to study them.
13. Payments of savings deposits: Although under the provisions of the Byelaws of
agricultural credit societies, these societies are permitted to accept saving deposits from
members, very few societies have been conducting deposit business. As regards other
types of societies, they cannot accept such deposits in view of the provisions of the
Banking Regulation Act, 1949 (AACS). Withdrawal forms should be supplied to the
depositor and his signature obtained thereon in the presence of the Chairman or a member
of committee. If this is not feasible, the payment made should be got attested by an
independent witness. The urban banks and district central banks are governed by Banking
Regulation Act, 1949 (AACS), and they have to frame rules for saving deposits and
transact business accordingly. Auditors should study the rules framed by the bank, and
guidelines issued by the RBI while checking deposits. It should be remembered that
Urban credit and Rural credit societies are collecting deposits, as provided in their
Byelaws, from their members only. They are prohibited to collect deposits from the non
members and general public.
14. Payment of interest on deposits and loans - The deposits receipts itself generally
contains provision for recording payment of interest on the deposit and also for obtaining
acknowledgement of the depositor. If interest is paid separately, regular voucher
mentioning full particulars of the deposits, interest accrued, period in respect of which
interest is paid etc., should have been obtained from the depositor. Interest on saving bank
account would generally be credited to the account of the depositor and added to the
deposit. As such, no separate voucher would be necessary. Amount of interest paid should
be checked with particulars furnished in the deposit ledger.
As regards interest paid on other borrowings, interest on bank loan or cash credit
would normally be debited to the account of the society half yearly on 30th September and
31st March. When the loan or cash credit is fully repaid, interest upto the date of closing of
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the loan or cash credit account will be debited and the entire balance including interest
charged would be recovered. Advices regarding debiting of interest and other charges,
such as godown rent, insurance charges etc., would be generally sent by the bank. These
advices and entries in the Bank Pass Book should be seen.
15. Payment of dividend and bonus - The discharged dividend or bonus payable should be
checked with the entries in the dividend or bonus paid register. If dividend or bonus
warrants are not issued, separate vouchers specifying the number of shares held, the rate
and amount of dividend or bonus should have been obtained. As regards payment of bonus
or rebate on purchases from or sales made through the society, a register showing
particulars of purchases made from the society or sales made through it by members and
the rate at which bonus or rebate is paid and total amount of rebate or bonus earned should
be maintained. If acquittances of the shareholders or constituents are obtained on the
dividend /bonus paid register itself, the individual items will have to be called over in the
cashbook.
16. Refund of suspense amounts. - Refund of amounts credited to suspense or to “sundry

creditors account’’ should be supported by regular vouchers specifying and the
particulars the amount of deposits refunded or paid. Where official receipts have been
issued, the original receipts issued to the parties should be called back, cancelled and
attached to the voucher itself. In lieu of separate vouchers, the original receipts obtained
back duly discharged would also serve as voucher. Where these amounts are adjusted,
contra entry should be seen. It should be seen that the amount has been credited to the
proper head of account.
17. Repayment of bank loan, cash credit and overdraft -Repayment of bank loan would
be checked with counterfoils of paying -in-slips receipts issued by the bank which would
also show separately the amounts credited to principal and interest account. Entries in the
passbook should be seen. Advices received from the bank in cases where amounts are paid
directly for credit to the account of the society and entries in the passbook should be seen.
Cheques operate some cash credit and overdraft accounts, repayment of cash credit,
overdraft and other advances obtained from bank would be checked with the counterfoils
of the paying-in-slips issued by the bank and entries in the pass book or the statement of
account.
18. Management expenses:- Payment of sitting fees and travelling expenses to members
of the committee- The members of the committee and other office-bearers of cooperative
are honorary workers and their services so long used to be gratuitous. However, there is a
growing tendency to pay on a liberal scale, allowances and fees particularly in the larger
societies. Section 160 A and B have been incorporated in the MCS Act and in the rule
number 107 A, wherein, the rates are fixed for travelling allowance and sitting fees by the
Government by notification issued in this respect, time to time. The rule provides that, ‘no
member of a committee of any society class of societies shall be entitled to receive from
the society travelling allowance, daily allowance and sitting fees, which are paid to the
members for attending meeting of its committees, or for performing any other function
as such members entrusted to them by the society at the rates higher than the rates
notified by the government from time to time, and all societies or the societies
concerned, as the case may be , shall be bound to comply with such rates.’ Auditors are
required to study these provisions, and verify the payments are made accordingly.
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Since fees to the committee members are payable for attending meeting, it is
necessary that Director’s attendance book showing attendance of director at each meeting
should be maintained. The fees and travelling expenses paid to the directors should be
checked from this book. Regular bills showing particulars of journeys performed and
expenses claimed should have been obtained in support of travelling expenses paid.
Attendance of each member should be verified from the attendance Book.
19. Payment of Conveyance charges.- A number of co-operative societies now maintain

motorcars and jeeps. It should be seen that when the vehicles belonging to the society are
used, no conveyance charges are paid either to the committee members or members of the
staff for whose use the vehicles have been purchased.
20.Travelling Expenses of staff. - Rules should be framed regulating payment to staff of

travelling expenses, daily allowance and other charges and allowances. Where advances
have been paid for meeting these expenses, it should be seen that travelling allowance bills
are obtained promptly and the advances recovered or adjusted. Enquiries should be made
into outstanding debit balances.
21. Expenses over maintenance of vehicles.- “Where motor cars or jeeps have been
purchased from out of the funds of the society, it should be seen whether the investment is
proper and necessary (Please see Registrar's circular No. ADT/ 184(ii) dated 17.9.63).
Rules should be framed regarding use of the vehicles .A log book should be maintained
for each vehicle and times of departure and arrival of the vehicle noted therein . For each
journey, duty slip should be issued to the driver of vehicle and signatures of the committee
members or member of the staff , who has travelled , should be obtained on the log book
or the duty slip The rules framed should also provide recovery of charges for private use
of the vehicles. It should be seen that all journeys not on the business of the society are
charged and the charges recovered from the persons making use of the vehicles. The
specific purpose of the journey should invariably be noted in the logbook. It is not
sufficient to mention merely “official purpose”, “ office work” , or some such vague
expression. Details of office work should be specified.
Separate accounts should be maintained for each vehicle for recording expenses
over its maintenance and repairs. The total expenditure incurred should not exceed the
provisions made in the annual budget. Monthly statements of expenditure incurred over
petrol, repairs, renewals, etc. Should be submitted to the committee or Board and its
approval obtained.
A register of unserviceable parts like tyres , tubes, etc. Returned when they are
replaced by new ones, should be maintained. It should be seen that sale proceeds of
unserviceable parts and other scraps are duly credited.
For control over vehicle expenses and its verification auditor should suggest the
conservative measures to the society. For obtaining the information on vehicle various
forms should be prepared and get filled from the society.
22. Expenses over maintenance of guest house:- A number of cooperative societies

particularly sugar factories, spinning mills and other large marketing, processing and
industrial societies and also some of the central and urban banks maintain guest houses
primarily for the convenience of their directors and distinguished visitors, who visit the
institutions. Many time , directors of the institutions, senior members of the staff and their
relatives and friends are also permitted to make use of the guest houses. It should be seen
that rules governing use of the guest houses have been framed and charges recovered from
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such of the persons who cannot be considered as guests of the society. A register showing
names of visitors, dates of their visit, times of arrival and departure and charges recovered
from them if any should be maintained. It should be seen that the expenditure incurred
over the maintenance of the guest houses is not excessive and does not exceed the budget
provisions made under this head.
23. Payment of Honorarium:- Payment of honorarium or allowances to the chairman or

honorary Managing Director is governed by provisions contained in Section 65(2) of the
MCS Act and can be paid only out of profits by way of appropriation of the net
profits by the general meeting and cannot be charged to the profit and loss account.
There should also be a specific provision in the Byelaws permitting payment of such
allowance or honorarium and also the scales of their payment. These are to be fixed by the
general meetings specific resolution of the general body should have been passed. ( Please
see Registrar’s circulars No. ADT / 243, audit memo, dated 8.1.64 and No. ADT / 665,
dated 29.7.1964 and 24.4.1965).
24.Payment of salaries:- Cooperative Banks, marketing societies and other institutions,

which employ a large salaried staff, should have evolved a scientific system of internal
control over recruitment, promotions, transfer, retirement, dismissals, etc., of the salaried
staff. In the case of new employees regular orders should be issued stating the salary, the
scales of pay and other allowances admissible, and the category in which the employee is
to be engaged.
In case of staff, which has been in continuous service, authorisation for drawing
increased salary, payment of periodical increments earned or the promotion to a higher
grade, should be seen. Total payments of salary paid during a month should be compared
with the amount paid in the preceding months. Reasons for any increase or decrease in the
total amount disbursed should be enquired into.
Acknowledgements of all employees should have been obtained on the salary book
itself. All deductions made should have been credited to the respective accounts.
Deductions made from salaries should have been properly authorised. Deductions
made on account of provident fund, income-tax, dues of employees’ societies and other
amounts payable to outside parties like Provident Fund Commissioner, Cooperative
society, Canteen, etc., should be paid over promptly. It should be seen that various
registers and service records are kept regarding leave, increments, punishments given etc.
25. Payment of donations and charities.- It should be seen that provisions of Section 69
of Maharashtra Cooperative Societies Act are being scrupulously observed. It should be
noted that no donations or contributions for any charitable purpose can be made except
from out of the Charity fund created for the purpose. All payments made should have
been duly approved by ;the Maharashtra State Co-operative Union , which has been
declared Federal society for purposes of this Section (Please see Registrar's circulars No.
ADM/6 ADT dated 18.4.1961, ADM/184-Gen dated 20.7.1971, ADM/184 (59) 24.4.1963,
and 10.8.63, and ADT/243(A.M.) Dated 1.7.64). The tendency to debit as current or
trade expenses payment of donation needs to be strongly objected to by the auditors.
Such payments will have to be made out of charity fund and debited to charities or
donations paid account and not to the profit and loss account. If there is no charity fund,
these amount should be debited to suspense or sundry debtors account in first instance and
shown as recoverable and subsequently written off against charity fund when created out
of net profits. ( vide Registrar’s circular ADM/184-Gen dated 20.7.1971).
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The Registrar in his circular No. ADM/6-adt dated 19.4.1961 has directed that
auditors should invariably point out in their audit memos, all payments made in
contravention of Section 69. A special report should also be submitted to the District
Deputy Registrar pointing out specific instances of such irregular payments.
26. Contingencies.- Payment of Rent, rates and Taxes, _ Payment of land revenue or
ground rent and other fees and taxes paid to Government and local authorities should be
checked with the receipts issued by the officers of the Revenue Department or other
officers who are authorised to receive cash and issue receipts. However, if payments are to
be made into Government Treasury or the State Bank of India, the receipted chalans would
be available.
Ground rent paid to landlord where land in held on lease should be checked with the
lease deed and the receipt issued by the landlord. It should be seen that all the terms and
conditions of the lease deed are properly complied with. Society having more than one
lease hold properties, the lease register maintained by the society, should be checked, and
to see that, required provision for lease rent payable is made, as well as lease rent paid in
terms of premium, should be written off as per duration of the lease.
Payment of rates and taxes including water charges paid to the municipality or other
local authority and electricity charges would be checked with the demand notices and / or
monthly, quarterly or yearly bill received from them and receipts for payment made to
them.
Payment for rent of office premises, godowns and other buildings hired will be
checked with the receipts issued by the landlord will have to be seen for ascertaining the
amount or rent or compensation payable and other terms. Hiring of premises and approval
of rent or compensation should have been sanctioned by the Committee. If any deposits or
advances towards rent or compensation have been paid, they should have been sanctioned
by the committee and the terms of their repayment or adjustment should seen. If any
expenditure is incurred towards repairs and maintenance of premises, the amount spent
should be got recouped from the rent payable.
27. Payment of electricity and water charges. - Payment of electricity charges would be
checked with the monthly bills issued by the State Electricity Board or the Electricity
providing Company as the case may be. The receipted bills themselves would serve as
voucher as no other receipts are ordinarily issued. It should be seen that the rebate for
prompt payment, wherever admissible, has been obtained. Where rebate has not been
obtained and penalty for late payment has been made, inquiries should be made. Where
water charges are to be paid separately and included in the municipal taxes, bills received
from the municipality should be seen.
28. Telephone Charges:-Telephone charges paid would be checked with the monthly or
quarterly bills received from the Accounts Office of the Telephone section of the Posts
and Telegraphs Department or telephone company. In case of landline phones a Register
of calls booked will have to be maintained for each phone and bills for calls received
should be checked from the entries in this book. Charges for privates calls should be
recovered from the parties marking the calls. In case of mobile phones provided to the
officers and office bearers of the society, it shall be seen that they are used for society’s
work. If the limit has been prescribed for such phones excess amount over the sanction
limit of the bill should be recovered from the officers concerned. Mobile phones are
purchased and provided by the society to the officers, it should be seen that adequate
provision for depreciation has been made, considering the provision of Income Tax Act,
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for such machinery and or considering the life of such phones and policy adopted by the
society for charging depreciation on such phones.
29. Postage and telegram charges. - Amounts of postage stamps purchased should be
traced on the credit side of the postage account. The balance of postage stamps on hand on
the date of audit should be counted. For a payment of telegram charges, receipt ( lower
perforated portion of the telegram form) which mentions the value of postal stamps affixed
or charges paid and bearing the date stamp of the post office, would be available. A copy
of the telegram/ fax sent should have been attached to the voucher from which it could be
verified that the telegram was sent for the purposes of the society. For payment of postage
on under paid or not-paid envelope and letter, the envelope or other cover or wrapper on
which is entered the amount of underpaid charges to be recovered , should be seen.
Similarly, for payment of V.P.P. Charges, the original wrapping or envelope on which the
amount is mentioned, should be seen. For payment of registration charges for articles sent
by registered post, the post office issues separate receipts. It should be seen that the cost of
revenue stamps purchased is not included inn postage and telegram charges. Society has
availed fax facility, it should be seen that the fax receipts generated from the machine are
zeroxed and attached with the voucher, as the writing on these receipts vanishes after some
period. Society who have contracted for courier services, the contract deed and payment
made and receipt provided by the agency should be seen accordingly.
30. Stationary and Printing charges .- Where large quantities of stationery articles are to
be purchased or printing work on a substantial scale is to be got executed, it should be
seen that before making purchases of stationery or placing orders for printing, the normal
canons of financial propriety, such as calling for tenders, inviting quotations and
acceptance of lowest tenderer or quotations , are being duly observed. If lowest tender are
not accepted, reasons for the same need be recorded. It should be seen that large advances
are not to be given to the printers before any printing work is executed. Payments should
be made only against completed jobs and delivery of printing material, for payment of
printing charges for printing forms, letter heads, register, notes, reports, etc., bills received
from the printing press specifying the printing work executed, quantities, rates, dates of
delivery, etc., should be seen. Proper account of receipts and issues of all forms, letter
pads, books, ledgers, registers and other printed material should have been maintained. It
is necessary to maintain an inward register for receipt of printing and stationery. The
stock register may be posted from this inward register. Issues and consumption of
stationery articles should have been properly controlled. Quantity account of stationery
articles and printed materials should have been maintained and checked by a responsible
officer at frequent intervals.
31.Payment of insurance premium.- Receipts issued by the insurance company

acknowledging payment of premia due should be seen. The amounts of premium to be
paid should be ascertained from the Insurance policy or temporary cover note issued by
the Insurance Company. A “Register of insurance policies” should be maintained showing
particulars of assets insured, risk cover, policy number, period, date of expiry, premium
paid, claims preferred , etc. Government has established a Insurance Fund and societies
are directed to insure there assets with the fund. Various circulars are issued in this regard
by the Registrar, Government, and Director of Sugar, and other officers of the Department.
Auditors should study the circulars and insure that the instructions are followed by the
societies. In case of Banking societies the Reserve bank and Nabard has issued circulars to
pay the premium to Deposit Insurance and Credit Guarantee Corporation within stipulated
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time for safe guarding interest of the depositors, the auditor should see that the premiums
required in proportionate to the deposits collected is paid within time limit, and the
information as such is disclosed in the annual report of the society/ Bank.
32. Advertising charges.- A newspaper cutting of the advertisement and the bill received
from the newspaper should have been attached to the voucher. The date or dates on which
the advertisement has appeared as mentioned in the bill should be checked with the copy
of the issue supplied by the press. Auditors should verify that there are no donations in
kind of advertisement, as well as the Registrar has issued circular , prohibiting societies to
advertise for well wishing advertises, anniversaries and well come advertises. The
auditors are advised to make special report for such advertisement. This circular contains
some financial limits for advertisement expenses, auditors should verify that the limits are
adhered to.
33. Miscellaneous.- Trade expenses, general charges, office expenses, expenses on

meetings and ceremonials, etc. - In case of fixed charges payable at regular intervals, the
scales will have to be fixed and mentioned by the committee. In case of other expenditure
it should be seen that the expenditure incurred in incidental to the business of the society.
It should not also be disproportionately high having due regard to the size and importance
of the society, the importance of the occasion, nature of the business conducted by the
society, need for publicity and similar other considerations.
34. Observation of budgetary provisions: It would be desirable to have annual budget

prepared and maximum amounts sanctioned for expenditure to be incurred over different
items and under different heads. Section 75 of the Act provides that, the annual budget
should be presented to the Annual general meeting and its approval obtained. It should be
seen that the expenditure incurred under different heads shall be within the provisions
made for them in the annual budget Expenditure over ceremonials, celebrations, general
meeting and other meetings , visits of importing persons (V.I.P.’s) etc., should not be more
than what should ordinarily be necessary. Expenditure over publicity, propaganda and
advertisement should have some relation to the expected increase in the volume of sales or
business of the society, in a particular line or general expansion of business or attraction
of new members and customers. If there is excess expenditure on certain items of the
budgets a re-appropriation statement will have to be prepared and kept before the next
general meeting for its approval. The society should establish committee for observation
of provisions of budget on periodical basis, headed by the Chief Executive Officer of the
Institute and members of the committee, and the heads of various departments of the
society. The allocation to the various departments should be made on the basis of the
demands received by them at the time of preparations of budget. It should be seen that the
budget should be prepared before the commencement of the year. And also should be
approved before commencement of the year, otherwise the purpose will not be served. The
budget should be in two parts for the capital Expenditure and receipts and revenue receipts
and expenditure. It should be seen that the capital expenditure should be met from the
capital funds realised in the particular year or the carried forward balance of such funds,
available with the society.
35. Expenses, which should be objected in audit.- The following expenditure, though
duly sanctioned by the committee or other authority , should be objected to by the
auditors-
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(i) Expenses which are not incidental to the business conducted by the society expenditure,
incurred which cannot be said to be for the purpose of the society, e.g. Personal expenses
of the directors, officers or employees. The Section 71(A) also prohibits for using societies
funds for the defraying the costs of any proceedings filled or taken by or against any
officer of the society, in personal capacity. The auditor should strongly object this
expenditure as the legal responsibility has been rested upon auditor under section 81 (2)
(vi) of the M.S.C. Act.
(ii) Expenses, which are not necessary and should in ordinary course have been avoided.
(iii) Expenses, which are considered heavy or disproportionate, considering the size of the
institution and importance of the occasion.
(iv) Abnormal expenditure over publicity, propaganda and advertisement.
(v) Unfruiticious expenses, i.e. Expenses, which would yield no results.
(vi) Fraudulent, false or fictitious expenses.
(vii) Other irregular or improper expenses such as illegal commission or allowance,
payment of on money, pagree, black money, etc.
(viii) loans and advances made by the society have been shown as deposits.
(ix) Expenditure not in furtherance of the objects of the society.
(x) financial assistance received from the Government or Government undertakings or
financial Institutions granted for which purpose is utilised for that purpose only.
Detailed notes of all objectionable expenses should be taken. These should be
discussed with the management and suggestions made to recover the amount involved
from the persons responsible. If no action is taken, specific mention thereof should be
made in the audit report. A list of all expenses, which have been objected to and which, in
the opinion of the auditor, should not have been paid from out of t he funds of the society,
should be contained in the schedules to be attached to the audit memo.
36. Checking of Journal.- When transfer entries are passed through the cashbook itself,
both the credit and debit entries should be seen simultaneously. Such contra entries should
be marked with a special tick in order to distinguish them from other entries, which
involve passing of cash. All contras or transfer entries should be checked very carefully.
Because these contra entries do not affect the cash on hand and no cash actually passes
hands, there is tendency to pass these entries without proper scrutiny. However, since
contras also create monetary obligations, they are as important as cash transactions and
should , therefore, receive due attention.
While vouching entries in the journal or in the cashbook, the auditor should see that
not only there is sufficient evidence in support of the entry, but also that the entry itself
correctly records the transaction. It should further be seen that all transfers from one
account to another account in the general ledger or from one personal account to
another should be passed through the journal or through the cashbook and no posting
into the ledger should be made directly in the ledgers. The following are the types of
entries, which are ordinarily passed through the journal,
(1) Transfers from one account to another
(2) Adjusting entries
(3) Rectifying entries
(4) Entries relating to depreciation, writing off of losses, bad debts, preliminary expenses,
deferred revenue expenses etc.
(5) Making provisions, carrying over amounts to reserves.
(6) Appropriation of profits.
(7) Allocation of expenses between capital and revenue and amongst the various
departments of business.
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(8) Bringing into account outstanding creditors, income receivable, expenses payable,
prepaid expenses, income received in advance, etc.
(9) Closing of nominal accounts.
(10) Opening and closing entries.
The narration below the entry or contained in the transfer vouchers ( both credit and debit)
should be gone through carefully and it should be seen that the entry has been correctly
passed. Most care should be taken while passing the adjusting and rectifying entries and
entries passed for transfers from one account to another. As these entries may result in
fraudulent or fictitious entries. While checking rectifying entries it should be confirmed by
the auditor that, the original entry requires rectification and the entry passed for
rectification really rectifies the original entry. Necessary documents and records must be
verified in these cases.
V-6 VOUCHING TRADING TRANSACTIONS:
1. Purchase: 1.Internal control over purchases: - The basic objective of the purchases is
to buy the Goods in Reasonable price and of required quality. The system of internal
control relating to purchases should be very carefully evaluated. Proper ordering
procedures are necessary to ensure that purchases are made only on terms and conditions
acceptable to the society, that they are in respect of goods and services that are necessary
for the business and that they are made from approved suppliers, a list of whom should be
maintained and always brought up-to-date. Proper buying procedures require that there is a
clear-cut definition of functions and authority between (a) requisition of supplies, (b)
placing of order, (c) inspection and recording of goods when received (d) checking and
recording of invoices and (e) payments to suppliers and other creditors. For Sugar
Factories the Director of Sugar has issued a circular describing detail procedure for
purchase for sugar factories, auditor should go through the circular and verify that the
procedure has been adhered to. Only the storekeeper , Chief Engineer, or other specified
officer/ heads of departments, should be authorised to issue requisitions. The buying
department should then take steps to invite tenders or quotations. A comparative table of
quotations received should be prepared and normally the lowest quotations should be
approved. The comparative table should contain (1) descriptions of supplies (2) rates (3)
technical norms specified in the enquiry floated/ advertisement calling tenders (4) Taxes
(5) terms of destination. If required the comparative table for technical specifications and
financial terms may be separately prepared. When lowest quotations or tenders are not
accepted, reasons for the same should be recorded. Where , on account of small value of
the purchase to be made, non-availability of the goods in the open market or other reasons,
regular quotations cannot be obtained, proper enquiries as regards rate should have been
made, before placing an order. All orders for purchases should be issued from the printed
order book, which should contain all the terms and conditions subject to which supplies
are to be made. In particular, prices and terms of delivery and payment should have been
specifically mentioned. In case of the bigger societies, it would be desirable to have a
separate “Buying/ Purchase Department” headed by a senior officer with expert
knowledge of markets. The officers authorised to issue purchases orders should be clearly
specified and the extent of their authority defined. As for as possible, official, who are
required to submit requisitions for supplies, should not themselves issue purchase orders.
Goods when received should be immediately inspected as regards quality,
quantities, conditions , taxes etc. Goods received should be entered into the “Goods
Inward Register”. The storekeeper should also prepare a “ Goods Received Note” (GRN),
copies of which should be sent to the Buying /Purchase Department and Accounts
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Department. The goods received note should be issued from the printed goods received
notebook with pre-numbered folios.
2. Purchase returns.- Goods which are damaged and are not according to the samples or
otherwise not satisfactory, should be returned to the suppliers immediately, along with a
Goods Returned Note. Copies of the Goods Returned Note should be sent to buying
department and accounts department. The suppliers should be requested to send their
credit notes immediately. It should be seen that credit notes from suppliers are received for
all goods returned or the amount deducted from the total amount of the invoice.
3. Checking of invoices.- Invoices when received should be checked both by the buying
department as regards, prices, quantities, discount allowed, terms of payment etc., and
also by the accounts department as regards their arithmetical accuracy. It should also be
seen that the invoices received are according to the orders of the buying department.
Where more than one copy of the invoice has been received, all other copies should be
stamped to indicate that they are duplicates. All invoices and credit notes should be
consecutively numbered on receipt and entered in an “ Invoice Register”. Outstanding
items should be investigated.
Invoices after being checked by the Accounts Department should be passed for
payment by the respective officers. These officers should be independent of the
Buying/Purchase Department.
All persons taking part in the checking of invoices should have initialled invoices in
appropriate places. During the course of their audit, auditors should see that the procedure
prescribed for making purchases and payments to creditors is strictly followed, as can be
seen from the initials appearing on invoices. They should also check the arithmetical
accuracy of the invoices. The entries in the Purchase Journal or Register should be
checked with invoices and the Goods Received Note or materials received certificates
stamped on the invoices. They should also check postings into stock ledgers. Casts and
cross-casts of the invoices and the Purchase Journal should be checked and agreed with
the amounts posted in the General Ledger.
4. Allocation.- Allocation of charges and credits to nominal accounts and cost

accounts should be done by proper authority .The basis for allocation should have
been shown on the invoices of the credit notes themselves .
The procedure prescribed for purchase of capital items should be ascertained .
Resolution of the Board /Committee sanctioning acquisition of or additions to fixed assets
should be seen.
The Auditor should see that proper arrangements to ensure that all liabilities
relating to goods received during the accounting period , have been duly brought into
account.
Where statements of accounts are received from suppliers , these should be
checked with respective ledger accounts. Wherever necessary, direct verification with
suppliers should be made .
The control account in the general ledger should be frequently checked by an
independent officer with the balances in the suppliers’ accounts .
5. Method of checking invoices - While checking invoices, the following points

should be noted -
(i) The invoices should be addressed to the society and not to any individual
director or officer of the society .All invoices should have been compared with the
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original requisitions and copy of the order issued by the Buying /Purchase
Department
(ii) The goods purchased should be such as are being dealt in by society in the
course of its trading transactions or are required for manufacturing processes.
(iii)Quantities and rates should confirm with the purchase orders . Where these are
not mentioned in the purchase orders, they should be verified from the
agreements, tenders accepted , Suppliers price lists or catalogues or other evidence
that may be available
(iv)Certificates as regards receipt of goods should have been recorded by the
storekeeper on the invoice itself or mention made of the serial number of the
goods received note under initials of the storekeeper .
(v)All calculations, extensions and additions should have been checked and signed
by the authorised person in token of having complied with the above requirement
(vi)Terms of payment - Where credit is allowed , it should be seen that payment is
made before the expiry of the credit period .
All trade discounts normally allowed should have been deducted from the amount
of the invoice . Cash discount , if allowed, should have been availed of by making
prompt payment.
6. Inventory control- Organisation of the Purchase Department - In case of

processing or manufacturing units , auditors will have to also to acquire sufficient
knowledge of the modern inventory management methods. They will have to
know how the Purchase Departments are to be organised on sound lines and made
to function.
The following points will have to be borne in mind. It may be seen whether,-
(1) A qualified and competent purchase officer is appointed ,
(2) Minimum, re-order and maximum levels are fixed ,
(3) Proper material planning is done ,
(4) Economic order quantities are fixed , and
(5) Procurement time is contracted properly .
It is necessary to see that a follow-up register is kept in the purchase
department. An up-to-date register will be very helpful in following the pending
orders ,evaluating vendors , to find out the total cost of purchases, to find out total
procurement time ,etc. It is also necessary to evaluate vendors before any order is
placed. The most common method by which venders are evaluated is by considering
quotations received and placing orders with the lowest cost suppliers. It may also
be borne in mind that the lowest cost may not be the best quality products always.
Hence, whenever the lowest prices are not accepted, the reasons must be recorded by the
expert, or the head of the department who has demanded the goods , that why the lowest
should not be accepted. Evaluation of vendors should be done every six months. It will
not only assure procurement time, but will also assure quality and hence ultimately low
cost of purchase optimised inventories. While evaluating vendors, Marks will have to be
given against various factors like procurement time ,quality, and cost after sale service
and general conditions of the suppliers .
7. Organisation of the store section - The auditors will have to see whether the
store section has been organised on proper lines. He should see that there is no
tendency to stock materials in excess of requirements . The auditors must be able
to suggest remedies against excess stocking by providing or using modernised
inventories management techniques . Thus , if re-order level is fixed , orders will
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have to be placed automatically and goods will be readily available in the stores .
Naturally, the usual complaint that “the intimation was short” will not hold good if the
re-order level is fixed properly. If vendor' evaluation is done and if the purchase system is
simplified, the procurement time will be reduced. If the imprest system is employed for
low priced items, excess stocking in them will be reduced. If the levels for the season and
off-season are different, there will be no excess stocking in the off-season. There are
various principles underlying optimisation of inventories. The most commonly system is
the system of ABC analysis. It is the system of arranging the items in the inventory
according to their importance. The objectives of this analysis are briefly as follows:-
(1) To determine the importance of each and every item in the stores.
(2) To fix the levels of stock based on the above ranking.
(3) Ultimately to optimise the stock.
Such a division facilitates maximum control over the inventory with minimum
effort. Thus, the principle under ABC analysis states, “ Control most which is important
most.”
According to this analysis “A” items will be as under;-
(1) High value items, (2) Highly used, (3) Scarce (4) Not very difficult to get, (5) Less
control, (6) Near to optimum, (7) Periodical checking
“B” items:- (1) Medium value items, (2) Used not very highly, (3) Not very difficult to
get, (4) Less control, (5) Near to optimum, (6) Periodical checking.
“C” Items:- (1) Low value, (2) Seldom used, (3) Readily available, (4) No control, (5)
Less checking.
The objects of fixing the levels are:-
(1) To lay down a minimum to be maintained in stock. This must be maintained to run the
factory.
(2) To lay down when to place an order for goods in such a way that the goods are readily
available in stock and yet without stocking them in excess.
(3) To lay down a maximum above which stocks should not rise in the interest of the
organisation.
(4) Ultimately to optimise the inventories, thereby reducing the idle investment to the
minimum.
Thus, there are three levels, -
(1) Minimum level (2) Reorder level, (3) Maximum level.
Just as the stores can be divided according to their importance, they can also be divided
according to their movement. Thus, they can be fast moving, slow moving or non-moving.
If any item has not moved to the extent of its inventory, it is slow moving. If the item
has not moved at all, it is non- moving and the rest of the items are fast moving.
There should be study at society level for these levels based on consumptions for the last
3 years related with production.
8. Auditors responsibility for proper organization of the store.- Auditors should be

able to trace out slow moving or non-moving items and they can thus advice the
management suitably to dispose off such items. If the non- moving items are idle
for 3 years continuously, they should be disposed off immediately. If the items
have moved at least once in these three years, the items are slow moving , the
difference between the existing stock and the maximum level should be calculated
. If this difference is more than 10 per cent of the maximum level, the inventory
making the difference should be immediately disposed off. Thus, the auditor should
see that the first steps with regard to ABC analysis are taken.
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The second step would be to fix the levels as suggested above and then
there would be a question of optimisation of the stores .
The auditors will have also to make suitable suggestions regarding
classification and modification of stores. The Cardex system will have to be
introduced instead of the old system of keeping bin cards in the bins or tagged to
the bins, where there is every possibility of getting them spoiled . The system of
taking perpetual inventory in some of the A and B class items will have to be
suggested. The auditors should apply their minds to all the problems as suggested
above and make suitable suggestion (vide Registrar, C. S’s circular No ADT/MISC,
dated 12-11-1970).
9. Store accounting - The auditor should see that proper control over stores and
works-in-progress comprising of reliable stocks and/or cost records are maintained.
These records should either form part of the financial accounts , or if separately
kept, they should be reconciled with the financial books. To ensure proper control
over stores, the storekeeper should have full control the stock material lying in the
stores. He should be responsible for receiving the stores and also issuing
materials. Issue of materials should be only against properly authorised requisitions
or indents signed by the foreman and sanctioned by the Factory Manager or other
responsible officer. The storekeeper should personally maintain quantity accounts
on bin cards of raw materials, stores and finished goods. Wherever possible, the
Cardex system should be introduced instead of maintaining quantity accounts on
bin cards, tagged to the bin or other containers. Accounts may be kept both in
quantities and values in Accounts Department. Financial control accounts should be
maintained in the Accounts Department against which the individual balances
should be periodically proved . Where quantity accounts are not maintained in the
Accounts Department, the accuracy of the accounts should be checked physically
by continuos stock taking and also by periodical evaluations of the detailed
quantity balances and reconciling them with the corresponding financial control
accounts. Under this system , the need for duplicate maintenance of accounts in
the Accounts Department and in the stores Department is avoided. However,
where a second record is maintained in the stores, this not only will provide a
cross checking and ensure accuracy of the stores records, but listing of the
balances for agreement with the control accounts maintained by financial books is
facilitated . The auditor, during the course of his audit, should examine the system
carefully. He should check the Goods Inward Register with the copies of the
Delivery Chalans, Goods Inwards Notes and the original invoices. The entries in the
Issue Register should be checked with the requisitions or indents submitted by the
Manufacturing and other departments. Where quantity accounts are maintained
separately, the balances as per the books should be compared with the balances
shown on the stock cards and discrepancies, if any , should be inquired into.
In modern computerised accounting system the store accounting as well as
financial accounting is maintained simultaneously, which helps the management for
immediate information of stores and about its consumption, balance and the cost of
such stores. For such accounting special programming have been developed by the
societies from the system supplier. Auditors should check the norms prescribed for the
programme, and see that the norms are proper and correct and no manipulation is
possible by the store accountants or the financial accountants.
The basis for allocation of costs for the stores issued should be
ascertained. The procedure for charging labour and other direct costs and overheads
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to works-in-progress should also ascertain. Transfer from work-in-progress to

finished goods account or “Cost of Goods sold” accounts should also checked .
The cost accounts should either be integrated or periodically reconciled with the
financial accounts .
10. Valuation of Inventories: The method of valuation of inventories should be verified

by the auditor. Major changes in valuation mode will have more impact on the cost of
production and profits. The auditor should see that the valuation is proper and accordingly
standard accounting policies that are fixed by the Board. Policies as laid down as per the
Indian Accounting Standards AS 2.
11. Sales- 1.Retail sales are mostly confined to consumers’ societies and other
societies , which deal directly with customers. So far as consumers’ societies are
concerned , the Byelaws require that sale should be for cash only or against
deposits kept with the society by the customers. Where credit sales are made, it
should be seen that necessary provision for selling goods on credit is contained in
the Byelaws . It should also be seen that credit limits are fixed for individual
customers and these are not exceeded.
2. Control over cash sales - A cash memo is issued for every sale . In a number of
cash memos, names of customers may not have been mentioned. However,
description of goods sold, quantities, rates, the amount and sales tax when charged,
are invariably shown in the cash memos. The auditor should compare the entries in
the Daily Sales Register with the cash memos issued. The procedure for fixing
selling prices should be ascertained. The society should be advised to maintain a
Price Register for showing details of calculations for fixation of selling rates. The
rates mentioned in the cash memos should be checked with the Price Register.
3. Checking of cash memos and Daily Sales Register.- Calculations, extensions and
totals should also be checked on a percentage basis. The auditor should carefully
study the provisions of the sales tax Act with particular reference to the schedule
in which the commodities dealt in by the society are contained. It should be seen
that the rates of sales- tax charged are correct.
The total sales for the day according to the Daily Sales Register should be
called over into the main Cash Book. The total sales according to the Sales
Register should also be compared with the cash received by the cashier according
to his Rough Cash Book or Cash Dairy. The accounts of sales tax collected should
be maintained separately. The total amount of sales tax collected should be paid
into Government treasury in the specified period along with the return of the sales
for the period .
4. Sales in manufacturing and processing societies.- As regards sales in

manufacturing and processing societies, the procedure followed should be
ascertained. Where goods are manufactured against orders a register of orders
received from customers should be maintained. The customers’ orders should be
formally approved before they are accepted. Where credit sales are made to
customers, credits limits should have been properly fixed and checked before orders
are accepted. The procedure adopted by the society, should be ensured that, orders
are accepted only on terms and conditions acceptable to the society. Where
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special concessions in rates or terms of payments are shown, reasons therefore

should be recorded.
A review of uncompleted orders should be taken be time to time and where
the completion of orders is unduly delayed, reasons for the same should be
ascertained . It should be seen that deliveries are made within the period agreed
for the execution of orders. Where part deliveries are made, outstanding
commitments should be ascertained and their terms and delivery period should be
reviewed. Such type of control is of particular importance in determining the
liabilities or losses arising out of the outstanding orders and also in assessing
the values of stocks on hand the works-in-progress.
It should be seen that, sale invoices are prepared for all goods despatched or
works completed. Invoices should be sent immediately on despatch of goods. Sale
invoices should be checked with entries in the Sales Register or Sales Day Book.
Acknowledgements of receipt of goods by customers such as receipted chalans,
delivery notes, etc., should be attached to the office copies of the invoices .
Where goods are returned by the customer or claims made in respect of
short deliveries, incorrect prices, damages in transit, etc., credit notes should be
issued. Quantities sold as per sale invoices should be traced in the stock register
and also compared with the issues of finished goods. Where there is a system of
issuing pro-forma or provisional invoices before actual despatch of goods are vogue,
the proforma invoices should be compared with sales orders and the goods
despatched notes and also with the final sale invoices and receipts advice notes or
delivery chalans. Sales invoices should be checked with the sale orders as regards
prices and terms of payment and delivery. Calculations, and additions should also
be checked. Credit notes issued for goods returned should be compared the Goods
Inward Register and other evidence. Price calculations , extensions and additions
should also be checked. All credit notes should have been properly authorised by a
responsible officer, who is not concerned with the Sales Department or the Sales
Ledger clerk.
12. Consignment accounts.- Where goods are consigned to out stations for sale, the
agency terms and conditions should be ascertained. In particular, procedure for preparing
invoices and recording sales should be ascertained. Separate accounts should be
maintained in respect of each consignment. Goods sent on consignment should be included
in stocks on hand and not treated as sold until regular account sales are received from the
consignee, when consignment account should be debited, crediting sales. Certificates
should be obtained from the consignee of all goods lying with him unsold. It should be
seen that balances in the consignment account are not mixed up with the sundry debtors
account.
13. Sales on approval or return.- Where goods are delivered for sale on approval or return
basis or ‘jangad’ sales as they are called, the goods sent, should be treated as stocks on
hand and the sales account should not be credited until the customer has conveyed the
acceptance of the goods or the period within which the goods, if not approved, should
have been returned, has expired.
14. Goods lying with third parties.- In case of goods lying with third parties. The auditor
should see that the certificates are obtained from holders of the goods for the stocks lying
with them. These certificates should specifically state the goods are the property of the
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society and that they are hold by the consignees or the agents on behalf of society. It
should be ensured that these stocks have been periodically confirmed by such certificates.
15. Goods received on consignment.- Where goods are received from third parties for sale
on consignment, it should be seen that these good and the sales of these goods are not
mixed up with the stocks or sales of the society. The stocks belonging to the third parties
should be excluded and the account of such sales should also be kept separately.
V-7 PAYMENT OF WAGES
1. Internal control over payment of wages.:- In societies, which have undertaken

manufacturing activities, such as Co-operative sugar Factories Spinning Mills, etc., a large
number of workers are engaged in manufacturing activities, Wages, therefore, constitute a
major item of manufacturing cost and should, therefore, receive a particular attention of
the auditor. The system in force with regard of the compilation of the payrolls and
payment of wages vary considerably with the size of the society and the nature of its
activities. The procedures involved in evolving a satisfactory system of internal control
over payment of wages can be grouped under the following broad categories:--
(a) Recruitment, promotions, transfer and dismissal of employees.
Written orders should have been issued for:-
(i) Appointment,
(ii) Rates of pay and other allowances,
(iii) Retirement or dismissal,
(iv) Promotions, increments , punishments, etc.
Rules should have been framed governing (a) service conditions including grant of
leave, retirement benefits etc. and (b) provident fund . Approval of the Registrar should
have been obtained where necessary.
History sheets should be maintained for all employees and all matters, such as
appointments, promotions, rates of pay, retirement, dismissal, etc.. Should be recorded
therein. The specimen signatures should also be obtained at the time of recruitment. These
history sheets should be maintained by the Personnel Department.
All general increases in pay, deductions from wages, payment of advances against
wages, etc.., should have been properly authorised.
(b) Attendance and job recording: Where wages are paid on time basis, the auditor should
ascertain the normal working hours and regulation regarding absentees.
(c) Compilation of sheets and analysis of wages.
(d) Disbursement of wages.
2. Principal features of Internal control- The principal features of sound internal system
for controlling payment of wages are as follows:--
(a) Muster rolls should be maintained to record the attendance of all employees. Where
clock are in use, it should be seen that all workers have been provided with cards and they
gets their cards duly punched on arrival into the factory and when they go out.
Arrangements for checking clocks cards and clocks should be ascertained and it should be
seen that there is proper supervision over the punching of cards or marking attendance on
muster roll. The timekeeper who responsible for the maintenance of the muster roll and
also the attendance cards, should be an independent officer. Where the number of
employee is large, a separate office should be set up.
(b) Where wages are paid on piece rate basis, the system of maintenance of job-cards and
clock-cards and their agreements should be carefully studied, as also the methods adopted
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for calculation op piece works and particulars of bonus scheme, if any. Arrangements
made for checking and authorising of piecework and treatment of partly completed jobs
should be examined.
Quantities produced by individual workers and entered on piece work, tickets or
job-cards, should be checked with the Daily Production Report and entries in the
Production Register or Finished Goods Register. It should be seen that all work is
recorded as and when completed and not carried forward.
(c) Where there is large number of employees, a regular procedure should have been
prescribed for periodical checking and testing of the records of the wages Department as
regards names of employees, rates of pay, deductions to be made and other standard
information. Such testing should be made by a person who does not take part in the
preparation of wage sheets. The method of preparing wage sheets or payrolls should be
examined. Attendance should be called over from clock cards or muster rolls and
production should be compared with job cards, production reports and other piecework
records.
(d) The system of notifying to the employees particulars of gross wages payable
and deductions to be made there from should be examined. Slips containing
necessary particulars are generally delivered to the workers in advance or are
inserted in the pay envelopes. These should be checked on a percentage basis.
(e) In case the society has appointed workers on contract basis from the agency providing
it, the auditor should see that, the workers posses required skill, the terms and conditions
of contract, compensation for any accident, responsibility of necessary legal deductions
from the wages, and other terms and conditions are included in the contract, and follow up
of the terms and conditions by the contractor. Necessary documents of the workers, if
required may be obtained from the contractors.
3. Method of checking pay rolls- (a) The auditor should have carefully examined the
system of internal control in force by calling for the time office record (attendance
cards and piece works cards, inspection reports, production reports, muster rolls from
the contractor or maintained by the time department duly verified) and checking these
with the entries in the pay roll or the wages sheets. He should also check
calculations and additions of the payrolls and also acquittances of the employees
acknowledging receipt of wages . He should also see that the payrolls have been
initialled by all persons taking part in the various stages.
The totals of pay-sheets of the different sections to be called over into an abstract
or summary sheets and the total wages paid should be traced in the cashbook.
(b)Deductions made from wages should have been duly authorised..
Deductions made on the account of provident fund , Employees’ State
Insurance, Income-tax, cooperative societies dues for repayment of loan etc. should be
paid over to the Provident Fund Commissioner and authorities within the
prescribed time. Dues of the employees’ society, canteen dues and other amounts
deducted from wages and payable to third parties should be paid within a
reasonable time. Totals of all deductions made under various heads should be
called over into the General Ledger.
(c) Wherever possible, the auditor should attend at the time of payment of wages
and satisfy himself that, the prescribed procedures are being regularly followed. In
order to test the various aspect of internal control, such as new appointments, increase
in pay and allowances, transfers, dismissal or resignation, etc.. The auditor should
scrutinise the wage sheets for a specific period with the information available in the
history sheets and relevant orders.
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(d) Where wages are paid on piece basis or additional wages are claimed under a scheme
of enhanced hours, appropriate job cards, piece work or bonus cards, should be examined
and it should be seen that these are duly signed by the foreman or the supervisor of the
section and also by a responsible officer of the wages Department. Quantities produced
mentioned in the job cards included over into the Daily Production Register.
4. Payment of overtime.- There should be a proper procedure for authorising overtime.

Overtime should be allowed only against written requisition by the foreman or a senior
supervisor of the section. Reasons for overtime should have also been mentioned. Payrolls
for payment of overtime should be separately prepared. The auditor should ascertain the
basis or payment of overtime, method of calculating overtime and rates of overtime wages.
The authority authorising overtime should be independent of the wages Department. It
should be seen that the provisions of the Factory Act and the Shops and Establishments
Act are duly observed.
V-8 LOANS TO MEMBERS
1. Restrictions on lending by co-operative societies.- Under provisions of Rule 45(1) of

the Maharashtra Co- operative Societies Rules, where a person is a member of more than
one credit society, he has to furnish declaration in form “K” that he will borrow from one
society only the name of which is specified in the declaration.
Under section 44(3) of Maharashtra Co-operative Societies Act, the state
Government has been empowered to prohibit, restrict or regulate the lending of money by
any society or class of societies on the security of any property. The Registrar has also
been empowered to regulate further the extent, condition and the manner of making of
loans. In case of cooperative credit structure societies, (primary agricultural societies,
district central banks and state cooperative bank) this section does not applies, such
societies has to adopt there own loan policy in conformity with the Reserve Bank of India/
national bank guidelines. Rules 42(1) empower the Registrar to prescribe margins to be
maintained, with reference to different commodities, securities or classes of societies. In
case of cooperative credit structure the societies has to follow the guidelines issued by the
RBI/ Nabard( National bank) in this respect. Under Rule 42(2), he has power to specify
the multiple of owned funds of the borrowing society up to which advances by way of
cash credit may be sanctioned by the central bank, or the apex Bank. Under Rule 42(5),
the Registrar has been empowered to prescribe condition for grant of loans to member
including maximum amount to be advanced and period of repayment both in regard to
total advances and also against different types of securities. In exercise of these powers,
the Registrar has issued a number of orders regulating and restricting grant of loans by
societies and banks. Auditors will have to study carefully the contents of these orders and
watch their compliance during the course of their audit. The orders are mentioned in this
manual elsewhere.
Section 21 of the banking Regulations Act (Applicable to co-operative societies)
gives wide powers to the Reserve Bank, to regulate and control advances by co-operative
banks. Rule 44(3) provides this for cooperative credit structure to follow the guidelines
issued by RBI/ National bank.
Under section 44(1) of Maharashtra Co-operative societies Act, no loan can be
given to a non-number or against the security of a non-member or on the security of its
own shares, or on the security of any person who is not a member. However, loans may be
made to non-member depositors against security of their deposit , to the extent prescribed
in its loan policy as per directives of the RBI, the amount of the deposit and for a period,
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which does not exceed the date of maturity of the deposit. Although inter-lending between
societies has been prohibited, the Registrar may permit such inter lending in special
circumstances, and the special sanction of the Registrar is necessary as per this section .
Although a borrowing member cannot offer shares in the society held by him as
security of his loan, still, under Rule 43 (1), he is required to hold shares in proportion to
the amount of the loan applied for by him.
2. Finance with Collaboration and partner ship: The societies can make collaboration
with the prior approval of the State Government and subject to such terms and conditions
as the State Government impose or prescribe. The collaboration under section 20 (A)
should be for specific business or businesses, including industrial investment, financial aid
or marketing and management expertise. For the societies to whom there is no
Government aid of any kind need not requires prior approval of the Government.
Under section 20, the two or more societies can enter into partnership for carrying
out any specific business or businesses. A prior approval of Registrar is necessary for
partnership if the society has any financial assistance from the Government, in the form of
share capital ,loan, or guarantee. The societies entering into partnership have to pass
resolution in the General Meeting with three-fourths majority.
3. Restrictions on lending operation of certain type of society.- Different type of

institutions have been set up to cater to the credit needs of different set of people and also
according to the purposes of which finance has to be provided. Thus agricultural credit,
multi-purpose and seva societies cater to the credit needs of agriculturists. In towns and
cities, urban bank or people’s bank urban credit societies, cater to the needs of the small
traders and industrialists. Employees of Government Departments, large and small
business concerns and industrial establishment have organised salary earners societies,
which give them loans for purposes, such as medical attendance, education of children,
housing etc. Societies have been set up for factory workers, teachers and other salary and
wage earners, which advance loan for short and long periods to enable them to tide over
their temporary difficulties. Land development banks (Agricultural and Rural development
banks) have been organised for provision of long term credit for development of land,
provision of irrigation facilities, purchase of tractors and other costly equipment which
increase the productivity of land earnings of farmer, the DCCB’s are also permitted to
finance for these purposes. Although the main object of all the institutions is provision of
credit, their constitution and operations are different. In the following paragraphs, an
attempt would be made to explain the salient features of the operations of these
institutions.
Under section 48 of the Act, every borrowing member of an agricultural credit
society is required to execute a declaration creating a charge in favour of the society, on
the lands held by him or his interest in the lands cultivated by him as tenant for the
outstanding dues of the society.
Section 49(1) of the Act lies down that every member of a salary-earners employees
society, while applying for a loan, shall execute an agreement authorising his employer to
deduct from his wages or salaries, the dues of the society as communicated by the society.
It is mandatory for the employer to deduct the amount as called by such societies, subject
to the provisions of Payment of Wages Act.
4.Transactions with non-members: As regards credit transactions and advances to non-

members, Section 45 of the Act lays down that transactions of a society with non-members
shall be subject to such restrictions as may be prescribed. Rule 46(B) requires that credit
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sales to non-members where permitted by the bye-laws can be made to only such tenders
and other persons who give undertaking to the society to refer any dispute to the
Cooperative Court for arbitration.
There are also restrictions on the loaning or credit operation of society, which are
not permitted to undertake lending business. Under Rule 44(1) of the Maharashtra Co-
operative Societies Rules, no society , the object of which do not include grant of loan or
financial accommodations to its members, can grant loans for sanction credit to any
member without the sanction of Registrar. However ,a society which has as one of its
objects, supply of goods or services required by members for production purposes,
may supply goods or services on credit against sufficient security on condition
that, the cost of the goods supplied or services provided shall recoverable from the
sale proceeds of agriculture produce or other goods produced by the member .
Under provisions of sub-rule (2) of Rule 44, a consumer’s society may sell goods
on credit to its members and other customers up to the extent of deposits received
from them.
These are important provisions and it is responsibility of the auditor to see
that the transactions of credit as well as non- credit societies are conducted or
regulated according to this provision. Besides these restrictions, byelaws of co-
operative societies contain number of provisions regulating advances and loans,
grant of credit to members. Purposes and periods for which and limits up to which
loans can be sanctioned are generally specified in the byelaws.
5. Checking of loan operations- Procedure and appraisal: Bye-laws of most of the

co-operative banks and credit societies provide that all loans to be made to
members are to be sanctioned by the managing committee or the Board of
Directors of the bank or society. However, in case of banks and salary-earners’
societies, where the membership is large, the byelaws provide for the appointment
of a loan subcommittee to consider and dispose of loan applications. In case of
some of the banks and societies, the President, Chairman, Managing Director,
Manager or other principal executive officer is also empowered to sanction loans
up to a specified limit by the officer should be ascertained.
The Managing Director, Manager, Secretary or other principal officer required
to verify the correctness of the information furnished in the loan application from
the records of the bank or society and to see that all necessary certificates and
documents accompany the loan application. He has also to record his
recommendation or otherwise on the application. The amount to which the applicant
is eligible and the amount which he recommends. During the course of his
examination of loan transactions, the auditor should satisfy himself so far as is
evidenced by initials of the clerks taking part in the scrutiny of loan applications
that normal procedure has been properly observed.
It has to be seen that regular applications for loans in the prescribed form
are obtained from all borrowers and duly considered and sanctioned by the
Committee. The proceedings of the meetings of the committee will, therefore, have
to be seen in order to ascertain whether all the loans have been duly considered
and sanctioned by the committee. The resolution sanctioning loans should be
specific and all the terms and conditions subject to which the loan has been
sanctioned and the purpose for which it is to be utilised should be contained in the
resolution.
Prior to sanction of loan the loan application is required to be scrutinised and
appraisal of loan should be made, on the basis of need of loan amount, purpose of loan,
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necessary qualification of the borrower, repaying capacity of the borrower, security

offered by him, terms of loan, repayment period, and realisation of sales or revenue. The
Nabard and RBI have issued several guidelines in this regards which should be acquainted
by the auditors and see that the banks have complied with the same. For any failure by the
bank to comply with such circulars, necessary qualification should be included in audit
report.
In order to be satisfied that the loan sanctioned is a genuine one and not
a renewal of an existing loan or conversion of a debit balance or mere book
adjustment entered as a fresh advance against repayment of an overdue loan
with a view merely to extend the period of its repayment, the date or dates of
repayment of the previous loan and the date of remittance of the amount to bank
will have to be ascertained and it will have to be seen that there is a sufficient
time lag between the repayments of old loan and disbursement of fresh loan. It
should also seen that all repayments of loans made by members are promptly
credited into bank intact and not kept on hand and utilised for giving fresh loans.
Even if the society has not borrowed from the bank, all recoveries should first be
credited to current account intact and cheques drawn for fresh loans.
6.Documents: It should be seen that all necessary documents such as application

for loans, loan bonds or agreements, surety bonds or mortgage deeds and
promissory notes wherever necessary are got duly executed from the borrower
and registered where ever necessary. Although certain documents executed by
members of co-operative societies are exempted from payment of stamp duty and
registration fees , other documents have not been so exempted and it is the duty
of the auditor to see that all documents, which have not been exempted from
payment of stamp duty , have been properly stamped . However, so far as
agricultural credit, multipurpose and seva societies are concerned, there are
practically no documents , which are required to be stamped. In regards loans
advanced by the urban banks, urban credit and rural credit societies, salary earners
societies requires stamp duty to be paid.
The documents required for various types of loans are ascertained, specifically the
documents related to security, continuing security, registration certificates, documents
creating charge, transfer documents of property if required. Documents after creating a
charge, insurance policies, are also taken or not should be verified. An annexure of
documents to be taken loan wise is enclosed, it is not exhaustive, and may change as per
requirement of the societies business.
7. Checking of loan bonds- Where a separate loan register is maintained, the

entries in the loan register should be compared with particulars contained in the
applications for loans and loan bonds and it should be seen that the following
particulars correspond,-
(i) Date of advance,
(ii) Amount advanced,
(iii) Name of the borrower,
(iv) Names of the sureties and/or particulars of other security obtained,
(v) Date fixed for repayment for loan or period of the loan and the terms for its
repayment, viz., the number of instalments in which repayable, amount of each
instalment, date on which instalment falls due.
(vi) Rate of interest ,
(vii) Purpose for which the loan is sanctioned.
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It should be seen that loans are sanctioned only for purposes provided for
in the byelaws. The amounts entered in the loan register should be called over in
the cashbook. Where no loan register has been maintained, the above particulars
should be mentioned in the loan bonds and application should be compared with
entries in the loan ledger. While checking loan bonds, the following additional
points should be noted:-
8. Additional points to be noted while checking loan bonds.- (i) The signature of
the borrower and signatures of the sureties should be examined. All signatures
should have been properly witnessed. Thumb impression should have been properly
described and attested. The signatures of the borrower and sureties are required to be
taken before the authorised officer of the society/ bank.
(i) Mode of disbursement.- Whether the amount of the loan has been paid in cash
or by cheque, should be seen. If any deductions have been made on account of
shares or compulsory deposits, it should be seen that the amounts deducted have
been properly credited.
(iii) Disbursement of loans by cheques - The societies should disburse all the loans by
Account Payee cheque only. Where the loans are disbursed by bearer cheques, it should be
seen that the payees themselves present the cheques for encashment at the bank. Some
societies disburse the loan by bearer cheque and the chairman and secretary encash all the
cheques together, which is not a good practice and the auditor should report such practice
in their audit report. This should be specifically checked in the case of Seva or Vikas
Societies, where in this system is used for renewal of loans without keeping proper time
lag as required by the policy of Nabard. Where loans are disbursed in cash, it is desirable
that the borrower should be paid in the presence of the Chairman or a member of the
committee, who should initial the bond or the voucher (if separately obtained) in token of
the amount having been disbursed in his presence . In case of large societies where a
separate cashier is appointed, it should be seen that adequate arrangements for control over
cash disbursements have been made.
(iv) It should also be ascertained whether any portion of the loan is to be disbursed in
kind i. e. in the form of seeds, fertilisers, insecticides, etc. or payment is to be made direct
to the suppliers of machinery like engines, pumping sets, etc. If so the arrangements made
for the supply of these requirements should be ascertained and it should be seen that
purchases have been made only from approved parties.
(v) Disbursement of loans in instalments- It should also be seen whether the
entire amount of the loan has been disbursed in one lump or in instalments as
and when required according to the purposes for which the loan has been
sanctioned .
9. Scrutiny and verification of loans and advances- Different kind of loans,

advanced by Urban Banks and societies.- Loans and generally classified into two
broad types- fixed loans and cash credits and overdrafts - the difference being in
the nature of operation of the accounts. Fixed loans are generally drawn in lump
sums in one or two instalments only; whereas advances to members generally
take the form of cash credits or overdrafts, are operated as if they are
current accounts. Although in agricultural credit societies and small urban banks
and societies, advances to members generally take the form of fixed loans
repayable in one lump sum or in suitable instalments, Central Co-operative Banks
sanction what are known as maximum credits to their affiliated societies based
on the loan requirements of their members. However, advances to other types of
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societies, generally take the form of cash credits. Urban banks and also commercial
banks ordinarily sanction cash credits and overdrafts. The difference between an
overdraft account and a cash credit account, the cash credit account begins with a
debit entry. Both cash credits and overdrafts are arrangements under which
cheques drawn by the constituents up to the limit sanctioned, are honoured by the
Bank. The arrangement is also for a fixed period, generally for a year and can be
renewed for a further period. However, before being renewed, the entire
outstanding balance is ordinarily required to be repaid and the account cleared.
Interest is generally debited monthly rests. Generally, there is a minimum interest
or half interest clause contained in the agreement and this amount is debited even
if the accrued interest is less than the amount. Sometimes, the operations are also
subject to certain restrictions such as crediting of entire sale proceeds of goods
sold into the account, maintenance of minimum balance, etc. RBI/ Nabard banks
guidelines are followed by the societies coming under preview of the Banking Regulation
Act 1949(AACS).
Cash credits include hypothecation, pledge, clean cash credits and overdrafts ,
which are described else where in urban banks section in this manual.
10. Loans against different kinds of security.-- In banks and other institutions
doing loaning business, loans are generally sanctioned against the following types
of securities:-
( i ) Loans against fixed deposits.
(ii) Loans against insurance policies.
(iii) Loans against gold and silver ornaments.
(iv) Loans against pledge of Government securities and other trustee securities,
share bonds and debentures.
(v) Loans against mortgage of immovable property .
(vi)Loans and advances against pledge or hypothecation of agricultural produce or
other goods.
(vii) Book debts
(viii) Housing Loans
(ix) and loans specified in byelaws for the purposes specified.
We shall now proceed to consider the various points , which are required
to be noted while checking different kinds of advances.
11. Loans against security of fixed deposits.- Loans against fixed deposits is an
important facility available to the depositor, since he can always secure financial
accommodation to tide over temporary difficulties without being compelled to ask
for refund of his deposit or being required to furnish other security. Obtaining
refund of deposit before maturity would involve considerable loss of interest as per
rules and guidelines issued by the RBI in this respect, and policy decided by the concern
bank or society. This is an important concession allowed to the depositors. From the
point of view of the lending bank also, the security is most perfect since availing
it would amount to extinguishing an existing liability. Although Co-operative societies
have been debarred from advance loans to person who is not their members, an exception
is made in the case of advance against the security of his deposit. Proviso below section
(2) of section 44 of the Maharashtra Co-operative Societies Act permits a co-operative
society to make a loan to a depositor against the security of his deposit. Thus, loans even
to non-members are permissible if they are made against the security of the deposit , held
by them by society. As per provision of Rule 45-A, loans against fixed deposit amount and
the period for which the loan is granted should not extend beyond the date of maturity of
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the deposit and the advance amount should not exceed 90 % of the deposit. As per Rule 45
A- 2 if the depositor does not repay the loan within the period for which it is granted, the
fixed deposit amount may be adjusted towards repayment of the loan amount and interest
thereon and only the balance, if any shall be paid by the society to the depositor on the
date of maturity. However the Reserve Bank of India in its Directive directed the urban
banks and DCCB’s to decide the margin for advance against fixed deposit.
Since deposit receipts are not negotiable, they will have to be got discharged and
assigned in favour of the lending society/bank before a loan can be made against the
security of the deposit. Instead of the usual rate of lending, interest at one or two percent
over the rate paid on the deposit is charged on such loans. Advance should have been
made against the deposit receipts issued by the bank itself. If advances are to be made
against the security of deposits with another bank the assignment of the deposit of the
receipt in favour of the lending bank will have to be got registered with the branch issuing
the receipt. The conditions subjects to which the deposit has been accepted will also have
to be carefully examined in order to ascertain that advance by another bank on the security
of the deposit of that bank and creating charge thereon are permissible. It has always to be
noted that in case of co-operative societies, what section 44 of the Maharashtra Co-
operative societies Act contemplates made by a societies against deposit with itself and not
with another institution. and the RBI/ Nabard has also issued guidelines not to advance
against the fixed deposit of another institution as possible as the bank can.
12. Loans on the security of Insurance Policies.- Ordinarily, insurance policies are
accepted only as collateral security, Moreover, since loans are also granted by the LIC
itself, there would be very few borrowers who would offer their life insurance policies as
security. All the same. Where insurance policies have been offered as security, the
following points will have to seen:-
(i) It should be seen that the policy is in the name of the borrower himself.
(ii) Receipt for the payment of the latest premium should have been attached to the
policy. An undertaking should also have been taken from the borrower that he would pay
all the future premia and keep the policy alive during the currency of the loans. In the case
of failure by the assured to pay premia as and when they fall due, the bank should have
authority to pay them and debit the amounts to the account of the borrower, along with
other charges and expenses incurred by it.
(iii) The policy should have been got assigned in favour of the bank or society, which
has lent the money and the assignment registered with LIC.
(iv) A certificate should have been obtained from the LIC for the surrender value of the
policy. Advance should be limited to 80% of the surrender value. It should be ascertained
whether the policy is subject to any charge encumbrance, etc.
13. Advances against gold and silver ornaments and gold silver bars etc., It is necessary
that a qualified appraiser is appointed to test and value the ornament and other article
offered as security. Resolution of the Board or the Committee regarding appointment of
the appraiser, the terms and condition of his appointment his duties and responsibilities,
remuneration payable to him ,etc., should be seen. A regular agreement should have
been got executed and adequate security should also have been obtained from
him. Every advance should be supported by a certificate of the appraiser containing
a brief description of the articles pledged, their contents, gross weight, net weight,
fineness, rate at which valued, market rate prevailing on the date of the certificate,
total value of the articles and the amount recommended for being advanced. When
the loan is repaid and the articles are sufficient to cover the balance of loan still
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outstanding. It should also be seen that the gold and silver articles lying in the
safe or strong room of the bank have been fully insured. It should be observed by
auditor the procedure followed by the bank for keeping the ornaments in safe proper
sealing is made to the bags, by the branch manager, borrower and the appraiser. Adequate
margin should always have been maintained and if owing to fall in the market
price return of some of the articles or other reasons, necessary margin is not
maintained , notice should be issued to the borrower either to pay up the difference
in cash or furnish additional security. Rules governing such advances should have
been framed and it should be seen that these rules have been duly observed. The
auditor should go through the rules carefully and satisfy himself that they
generally confirm to the model rules framed by the Department for guidance of
co-operative banks. As this business is risky, no advances should be made unless
the fineness of the gold and its value is guaranteed by an expert goldsmith or
dealer of high professional standing and unquestioned integrity. Actual inspection of
the articles in possession of the bank should be carried out during the course of
audit.
14. Advances against pledges of Government and other trustee securities, shares,
bonds and debentures.- Particulars of the securities pledged, their markets-value
etc., should be seen. Since it is difficult to ascertain the value of the shares and
bonds, etc., which are not quoted in the market, advances should ordinarily be
restricted to Government securities and other bonds, shares debentures, etc. For
which market quotations are available. The valuation should be based as guidelines
from RBI prevailing on the date of advance and should be obtained from FIMMADA. If
the borrower himself has not purchased the securities, it should be seen that the last
endorsement is in his name. It should also be seen that all interest warrants not
due for payment are intact. Actual inspection of the securities if, in possession of
the bank should be carried out during the course of audit. Since the Reserve Bank of
India has prohibited physical possession of the securities, and only permitted to be in the
form of demat, the certificate of bank/ depository, in which the securities are deposited, a
certificate in that respect should be called from the bank for verification.
If the securities have not been endorsed in the name of the lending bank ,
a letter of assignment should be got executed along with blank transfer forms
duly signed by the owner of the securities. Wherever necessary, the charge created
in favour of the lending bank should be got registered with the authority issuing
the bonds or certificates and with the depository. Restrictions on the transfer of some
of the securities like rural debentures issued by the State Co-operative Land
Mortgage Bank and certain other institutions should be noted. In view of the
restrictions on the transfer of shares of co-operative societies and the right of set
off available to the societies against shares held by their members, shares of co-
operative societies should not be accepted as security for loans. It has also to be
noted that the Co-operative Societies Act forbids societies to advance loans on
the security of the shares issued by himself. Since seconds charges are not
recognised in case of certain bonds and debentures, care should be taken to see
that prior encumbrances have not created on such securities.
Securities carrying Government guarantee should be preferred. Quotations should
always be obtained before making advances. Necessary margin always be insisted
upon. Since securities not quoted in the market are not ordinarily in demand, it
would be risky to make advances on the security of partly paid shares, the
contingent liability in respect of the unpaid calls should be duly considered. RBI
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has issued detail guidelines in this respect, the auditor should carefully study these
circulars while checking this type of advances.
15. Advances against pledge of goods- Certificate of the Manager or other

responsible officer for having taken possession of the goods should be seen. Every
time additional goods are taken into custody, “intake notes” signed by the
borrower should be obtained and certificate of receipt of goods by the Manager
should be seen. Similarly, when goods are released, “delivery orders” signed by
the Manager mentioning the amount credited and the quantity of goods to be
released should be issued. Goods should have been released only against
repayments and it should be seen that the market value of the remaining goods
adequately covers the outstanding balance .
The Advances Register maintained by Bank / Society should furnish full
particulars of the goods pledged, their type or quality, period of production and if
perishable goods are pledged, the perishable period, prevailing market rate , total
value, amount advanced and margin required to be maintained and margin actually
maintained. Agricultural produce or other goods pledge by different borrowers
should have been stored separately. All the goods should have been adequately
insured and the insurance policies taken out in the name of the lending bank . If
the godown in which the goods are stored is not owned by the bank, it should
have been hired in its name. The lease agreement should be examined with a
view to ascertain whether there are any restrictions on the use of the godown for
storage of certain types of commodities. There must always be a signboard
bearing the name of the lending bank, hung over the main entrance. The locks
should also bear these of the bank.
The produce or the goods should have been so arranged as to facilitated
easy checking. The gunny bags or other containers in which the agricultural
produce or the other goods are stored should have been neatly arranged in
convenient rows so that they can be easily counted or taken out for measurement
or for weighting. Where agricultural produce is stored in loose condition (that is in
bulk or heaps) measurement will have to be taken to estimate the quantities. All
the godowns may be visited and the goods actually verified and counted during
the course of audit considering the internal control for the godowns.
16. Advance against hypothecation of goods-- As regards advance against hypothecation
of goods, it has to be noted that, although a charge exists against the goods hypothecated
in favour of the lending bank, the possession of the goods continues to be with the
borrower and he is free to dispose of the goods as he likes, provided, the remaining goods
are sufficient to cover the outstanding balance as per terms stipulated in the agreement. In
some of the agreement , the borrower binds himself to credit to his loan account all sale-
proceeds of the goods sold by him.
The borrower is required to submit, as may be stipulated daily, weekly, fortnightly
or monthly statements of stocks lying in the godown and hypothecated to the bank. The
stock statements submitted by the borrower are required to be carefully examined and it
has to be seen that the required margin is always maintained . The insurance policy is
also required to be taken out in the name of the lending bank. The actual stocks
should also have been inspected by the officers of the bank at frequent intervals.
In addition to the periodical stock statements, monthly trial balances and other
statements showing the financial position of the borrowing institution are required
to be obtained. In case of the individual borrowers, confidential inquiries
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regarding their financial position and their dealings in the market should be made
periodically
It has to be noted that several restrictions have been placed by the
Reserve Bank of India on such type of advances. Although in the case of
advances against pledge, advances up to sixty percent and in some cases, even up
to seventy per cent of the value of goods pledged are generally allowed, the
restrictions pledged by Reserve Bank of India advances against agricultural produce
and in particular against food grains and industrial raw materials, such as cotton,
oil seeds, etc., should also be taken into consideration and it should be seen that
the directions issued by the Reserve Bank of India in this regard are being
scrupulously observed. As already stated, Rule 42 empowers the Register to issue
with the approval of the Apex Bank, directions regulating grant of loans by co-
operative societies. The following are the more important orders issued by the
Registrar in exercise of powers vesting in him:-
(1) Registrar’s Order No. BNK-110/Fin., dated 8-9-1964 regarding crop loan systems.
(2) Circular No BNK-110(Fin.) Dated 16-2-1963 regarding policy to be followed for
financing defaulters .
(3) Circular No BNK-75(Fin),dated 12-10-1964, regarding crop loan system.
(4) Order No. BCB-110 (Fin), dated 18-10-1965, laying down conditions for
acceptance of deposits and raising of loans.
(5) Order No.-75 (Fin), dated 17-12-1966, under Rule 42 (1), regarding regulation of
loans.
(6) Order No. BCB-75 (Fin,) dated 17-12-1966, under Rule 42(2), regarding grant of
cash credits.
(7) Order No. BCB-75 (Fin,)dated 17-12-1966, under Rule 42 (5), laying down
conditions for different types of loans.
(8) Order No. BCB -75- (Fin) dated 2-2-67 regarding margins.
The auditors should carefully study the above orders and circulars and see that
they have been duly complied with.
MASTER CIRCULARS The Reserve Bank has issued various circulars in respect of
hypothecation and pledge loans and advances, and has consolidated them in to master
circulars in 2006 and are revised in July every year, auditors have to study them, from
obtaining it from the website of the RBI.
17. Advance against mortgage of immovable property.- Title deeds such as sale deeds, or
certificates issued by the Revenue Department or by the Civil courts showing title in the
immovable property and the nature of tenure and other terms and condition subject to
which lands or other immovable property has been held, Restrictions on its alienation or
transfer and creating charges or encumbrances thereon, should have been carefully got
examined and the solicitor’s or legal adviser’s certificate regarding title of the borrower
and his right to mortgage the property should have been obtained. The documents should
appear to be genuine and should refer to the particular property mortgage to the bank or
society. Other evidence such as extracts from village record of rights (7/12), city survey
records, index II, revenue account abstract from talathi, receipts issued by Revenue
Officers acknowledging payment of land revenue or ground rent, notices and receipts
issued by the local authorities for payment of taxes on the property should be examined in
order to be satisfied that the property belongs to the borrower and continues to be in his
possession. Valuation report of the architect or the engineer should also be seen in order
to be satisfied about the adequacy of the security. The mortgaged property should have
been insured for its full value and the policy assigned to the lending bank.
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Since the lessee has no permanent interest in the land, recovery of loans
made against mortgage of the lease hold property, will have to be before expiry of
the period of the lease. Interest of co-parceners in property held by a Hindu Joint
Family will have to be examined and it will have to be seen that purpose of the
loan is one for which the joint family estate can be mortgaged for securing a
loan.
It should be seen that the charges created on mortgaged property are registered
with the competent authority, and registration certificates are obtained. In case of
companies, to whom loans are provided on mortgage of property, charges should be
registered with Registrar of Companies within stipulated period as per Companies Act
2013.
18. Discounting of bills and hundies.- Discounting of bills and is an extremely

popular form of temporary accommodation granted by banks. In the co-operative
sector, this business is mostly undertaken by urban banks. Cheques and hundies
received from the customer are immediately credited to his account and he is
allowed to draw cheques against unrealised bills up to the sanctioned limit. Since
drawings are allowed before the bills received for collections are realised, the risk
of dishonour of the bills or cheques is always there. As such, very careful inquiries
should have been made about the financial position and integrity of the
customers to whom this facility is allowed. In some of the banks, what are known
as time or usage bills are also discounted and the bills are presented for payment
and the amounts collected on due date. Bills or hundies may either be clean bills or
documentary bills. In the latter case , they are accompanied by railway receipts or other
documents showing title to the goods , which are to deliver to the drawee or
consignee only against payment of the bills. Since the title to the goods consigned
to the drawee continues to the vest in the drawer, discounting of such bills is
quite a safe mode of investment of funds, provided due care and caution is
exercised and the party is known to the bank. As regards clean bills, since in
most cases, they are mere accommodation bills or “kites” as they are known, very
careful inquiries are required to be made about the material assets possessed by
the borrower, his integrity and reputation for honesty in his dealing and the status
enjoyed by him in business circles. The Reserve Bank of India has prohibited issuing
such bills, cheques for misuse of banking channel, the auditors should carefully examine
these types of transactions and advise the bank to stop such practices.
Discounting of bills and hundies is one of the most remunerative modes the
employment of funds short periods. However, the bills should have been purchased
only from approved parties, whose credit limits have been fixed after making
very careful inquiries about their financial dealings and their status and their
credit in business circles. The movable and immovable properties held by them are
also required to be considered. Limits should have been fixed separately for clean
bills and other bills , which are accompanied by documents evidencing title to
goods such as railway receipts, etc. While checking these transactions, the auditor
should see whether the bills discounted are genuine trade bills or are mere
accommodation bills. Cases of misuse of hundi limits discounting of hundies
beyond the credit limit fixed, meeting of previous hundies already discounted and
due for payment by drawing or accepting fresh hundies, frequent dishonour of
bills or delay in honouring them, cases of reimbursement of dishonoured bills by
accepting cash payment from the limit-holders, etc., should receive particular
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attention of the auditor with a view to ascertaining whether this business of

discounting of bills and hundies is being conducted on sound lines.
As regards payment of cheques received for collection before they are
realised, it may be observed that collection of cheques on behalf of constituents is
a very important service rendered by the banks. However, this does not mean that
the amounts of the cheques should be paid or credited to the account of the
constituents before they are realised. Upcountry cheques are required to be sent by
post to collecting banks or the drawee bank and considerable delay occurs before
the proceeds are realised and there would be considerable loss of interest. As
such except in certain exceptional cases, proceeds of cheques are not credited to
the account of the constituent before realisation. However there should be no
objection for discounting them provided they have been received from approved
parties to whom hundi limits have been sanctioned.
MASTER CIRCULARS The Reserve Bank has issued various circulars in respect
of facility regarding bills discounting to be given to the customers, and has consolidated
them in to master circulars in 2006 and are revised in July every year, auditors have to
study them, from obtaining it from the website of the RBI.
V-9 INVESTMENT OF FUNDS
1. Investments in shares of co-operatives- Under Section 70 of the Maharashtra

Co-operative Societies Act, societies are permitted to invest its funds in the shares
of any other limited liability society. Federal societies have been set up to
facilitate the operations of different classes of primary societies. Since membership
of federations is compulsory, all primary societies are required to buy shares of
their respective federal societies.
All societies- both agricultural and non-agricultural- are required to
purchase shares of the District Central Co-operative Bank or other financing
agency from which they borrow. Marketing and processing societies facilitate the
operations of agricultural credit societies, by helping to link up credit with
marketing and processing. Hence, agricultural credit societies have to purchase
shares of the marketing and processing societies operating in the area. Primary
marketing societies are required to be affiliated to their respective District
Marketing Federations and also to the State Co-operative Marketing Federations .
Dairy societies are required to be affiliated to their Milk Unions and buy their
shares. Housing societies, if they want to borrow from the Maharashtra State Co-
operative Housing Finance Society, have to become its members. All primary
societies are thus required to invest certain portion of their funds in the shares of
their federal societies.
2. Restrictions on investment in shares of other societies .- However, it should be

seen that shares of only such institutions, which have been organised for the
furtherance of the objects of the society or otherwise assist the society in its
operations, are purchased. The amounts invested should also not be
disproportionate and in no case should exceed a reasonable percentage of the paid-
up share capital of the society.
Under Section 19 of the Banking Regulations Act, Co-operative Banks are
not permitted to purchase shares of any society other than the Central Co-
operative Bank and State Co-operative Bank except to the extent permitted by
the Reserve Bank of India. It should be seen that if any co-operative bank has
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invested its funds in the purchase of shares of any other co-operative society, it is
permissible under that Act and also that the amount invested does not exceed the
limit specified in the directive issued by the Reserve Bank.
3. Method of checking investments in shares.- Receipts or other

acknowledgements, acknowledging receipts of the share money should be seen.
Since payments are generally made by cheques or debited to current account,
entry in the Pass- book will also provide supporting evidence. The share certificate
issued by the bank or other society should also be inspected.
4. Investment in fixed or call deposit with Bank - Funds, which are not
immediately required for the business of the society, are generally invested in
fixed or call deposits with the Central Bank. The original fixed / call deposit
receipts issued by the bank should be seen . If the deposits have been withdrawn,
advices or credit notes and entries in the bank passbook will have to be seen.
Call deposit and fixed deposit receipts, which have not matured, should be
inspected. The Urban Cooperative Societies are prohibited to invest there funds in another
cooperative urban credit societies, or urban banks without prior approval of Registrar. As
well as the Urban Cooperative Banks are also prohibited to invest their funds in the Urban
Credit Societies and are required to invest their funds in Central financing Agencies, by
the Reserve Bank of India.
5. Purchase of national plan loans, saving certificates and other Government

and trustee securities, bonds and debentures- If the purchases are made through
the banks, the banks’ memoranda of purchases or advice notes and entries in the
bank passbook would be available. If purchases are made through brokers, the
brokers’ “bought notes”, blank transfer forms or endorsements, etc., will have to
be seen. As securities are placed in demat accounts , certificate issued by the depository
should be seen. In case of bearer bonds, it will also have to be seen that all the
interest coupons are intact. It should also be seen that the investment made is
permissible under Section 70 of the Maharashtra Co-operative Society Act. If
securities are pledged with bank for safe custody or as security against advances,
certificates will have to be obtained from the bank and inspected by the auditor.
The Reserve Bank of India has issued various guidelines and directives regarding purchase
of securities, bonds and trust securities, PSU Bonds , the auditors should carefully study
these, and physical verification should have to be done. The guidelines issued by the RBI
are described elsewhere.
6. Purchase and sales of investments- In addition to contract notes issued by the

broker, agreements and correspondence should also be seen to verify the
correctness of the rates. All purchases and sales of investments should have been
sanctioned by the committee or the committed appointed for this purpose. Resolutions
of the committee should be seen. Rates at which purchases or sales have been
made, should be compared with the market quotations prevailing on that date. It
should also be seen that necessary adjustments on account of interest accrued
and income tax deducted are properly made. Reserve Bank of India has issued
various directives for purchase and sale business of investments by the urban banks,
DCCB’s which are covered under B.R. Act (AACS) , are described elsewhere. If the
securities are purchased or sold by the bank without the help of the broker, the auditor
should see the deal slip for purchase and sale, with demat account and see that the
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transactions are taken place with due care, and reasonable rate prevailing at the time of
purchase or sale.
7. Purchases and sales of securities on behalf of customers.- Co-operative banks

and other financing institutions which purchase and sell securities on behalf of
their clients, should maintain separate demat or SGL accounts of the purchases
and sales made on behalf of clients. It should be seen that the income, rights
and other benefits relating to them are properly charged and credited to the
accounts of the customer concerned. Reserve Bank of India has issued various
directives for purchase and sale business of investments by the urban banks, DCCB’s
which are covered under B.R. Act (AACS) , are described elsewhere.
8. Investment in treasury bills - Some of the societies, particularly, urban banks,

central banks, find a remunerative outlet for their surplus funds in treasury bills
or other short-term investments , which are generally sold at a discount. The
difference between the face value and the purchase price represent the return
on the amount invested. Reserve Bank of India has issued various directives for
purchase and sale business of investments by the urban banks, DCCB’s which are covered
under B.R. Act (AACS) , are described elsewhere.
9. Switching operations -- When certain investments are sold and the sale proceeds
received are utilised for purchase of other investment, the operations are known as
switching operations. The profit and loss realisation should be brought into the
account and the new investment should be entered at its actual cost. Reserve
Bank of India has issued various directives for purchase and sale business of investments
by the urban banks, DCCB’s which are covered under B.R. Act (AACS) , are described
elsewhere
10. Badla transactions-- These are purely speculative transactions involving

purchase and sales of securities not with view to investments, of funds, but
merely to profit by the rise and fall in the prices of security and no delivery of
securities purchased or sold, is necessary. Only the differences are paid or
received on dates fixed for settlement Auditors should see that co-operative
banks do not employ their funds for such transactions. Reserve Bank of India has
issued various directives for purchase and sale business of investments by the urban banks,
DCCB’s which are covered under B.R. Act (AACS) , are described elsewhere.
V-10 INVESTMENT IN IMMOVABLE PROPERTY, PURCHASE OF

LANDS AND BUILDINGS .
1. Purchase of lands buildings - Where lands buildings are purchased, agreement

for sale and the sale-deed itself will have to be seen. Both the documents should
have been properly stamped. The sale-deed should also have been registered.
Title deeds showing title of the vendor to the property and also such other
evidence like 7/12 extracts, 8A abstracts from village record-of-rights, city survey
records, sanads granted etc., should be inspected. Receipt for payment of ground
rent or land assessment, municipal taxes, etc., which show that the property
continued to be in the possession of the vendor till the date of sale, should also
be seen. The title deeds should have been carefully examined by legal
advisers. They should appear to be genuine and refer to the particular
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property to be purchased. The dates and sequences of the conveyance should be

checked and it should be seen that, the last conveyance is in the name of
vendor. The valuations of the building should also have been made by a
competent architect or engineer. Stamp duty, registration charges and also legal
charges and architect's fees may be allowed to be capitalised. If the building
were purchased in an auction sale or through the Civil Court, the auctioneer's
report , or certificate granted by the court would be available. If the building is
sold under an order of a Civil Court, certificate granted of transfer of title to
the property issued by the court will also be available. It should be seen that all
the documents of title to the property are delivered and conveyance duly
completed. Resolutions of the Board, Managing Committee or of the general body
as may be seen. It should be seen that necessary permission of the Registrar as
required under Section 70 of the Act for purchasing the building has been
obtained. When buildings are purchased or constructed out of the Reserve Fund
and other surpluses, permission of the Registrar for utilisation of the amounts for
construction works will also have to be obtained in addition to the permission
for investment of funds in immovable property as required under Sections 70 of
the Maharashtra Co-operative Societies Act . In case of Banking institution,
provision of Section 9 of the Banking Regulations Act 1949, will have to be
observed regarding disposal of the non-banking assets . According to this
section, no co-operative bank is to hold any immovable property, howsoever
acquired, except such as is required for its own use for any period exceeding 7
years from the acquisition thereof or from the commencement of the said Act,
whichever is later or within such extended period as is provided in the said Act,
with permission from the RBI.
2. Investment of Reserve Fund in immovable property .- As regards investment of

the Reserve Fund in immovable property, it has to be noted that under clause (iv)
of sub-rule(i) of Rule 54 of the Maharashtra Co-operative Societies Rules, co-
operative societies may utilise or invest their reserve fund in any immovable
property specified by the Registrar by general or special order. Societies, which
desire to withdraw any portion of their reserve fund for investment in
immovable property, are required to obtain specific sanction of the Registrar. The
Registrar in his Circular No.ADM/184(28), dated 16-8-1963 has directed that the
following norms should be invariably followed while granting permission to any
society for utilisation or investment of its reserve fund in immovable property:-
(i) The amount to be invested in immovable property should not exceed half the
total amount of the reserve fund.
(ii) The society concerned should be of at least 5 years’ standing.
(iii) The society should be in ‘A’ or ‘B’ class.
(iv) The society should agree to the creation of a first charge for the amount to
be so invested on the profit which it would earn in subsequent years to make
good the amount within a period which may not ordinarily exceed 10 years.
(v) The land purchased or the building to be purchased or constructed should be
advantageous to the society in the conduct of its business.
These conditions are generally specified in the order permitting investment
of reserve fund in immovable property. Auditors should see that the conditions
specified in the order are duly complied with. The committee has been constituted by
the Registrar for permitting such investment, headed by the DDR, DJR and CRCS at
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various levels, for specified amount. The auditors should verify the society has submitted
his proposal for scrutiny and permission to these authorities.
3. Construction of buildings; approval of layout plans.- Before commencement of

construction work in rural areas and in towns and cities outside municipal
limits, permission for use of the land for non-agricultural purposes, should have
been obtained. The layout plans and plans for building prepared by the architects,
qualified engineers or engineers, should have been got approved from the
municipal or other local authorities wherever necessary. Where godown or
buildings are to be constructed out of loans sanctioned by the Government , it
should be seen that the plans and layouts conform to standard pattern approved
by the Government Engineer. All changes in the plans and layouts should also
have been got duly approved from competent authorities.
4. Appointment of contractors.- Where construction of buildings is entrusted to

contractors, it should be seen that the normally accepted canons of financial
propriety, such as calling for tenders or obtaining quotation, comparison of rates
and acceptance of the lowest tender, enquiries into financial position and past
performance of the contractors , etc. are duly observed. If tenders are not called
for and the contract is entered into by private negotiations or where the lowest
tender is not accepted, reasons for not calling for tenders or for not accepting the
lowest tender should be ascertained. The rates agreed upon should not be more
than the prevailing rates for similar works. The following further points should be
seen:--
(i) Whether tender deposits has been collected and regular agreement on stamped
paper has been got executed in the form prescribed by the Institute of Chartered
Architects.
(ii) The terms and conditions should be examined particularly in regard to (a)
supply of materials and deduction of the cost thereof from the bills, (b) payment
of advances, deduction of retention money from the amount of the bills, (c)
payment of damages for delay in completion of works, appointment of
subcontractors , etc.
(iii) Measurement books should be maintained by the building supervisor, clerk of
the work or other employee of the society supervising over construction work.
Measurements of all works executed should be taken at regular intervals under
the direct supervision of the architect.
(iv) All running bills should be duly checked by the architect. Quantities shown
in the bills should be checked from the measurement books and rates should
be compared with rates specified in the tender form filled in by the contractor and
accepted by the society.
5 Payments to contractors.- The agreement entered into with the contractors should
be seen and it should be ascertained whether lump sums are to be paid on
completion of specific stages of the work or advances are to be paid from time
to time against running bills to be submitted according to progress of work.
Advances to contractors during progress of work should only be made against
progress reports and valuation of work as certified by the architect. Running bills
should have been submitted through the architect who should have checked
them and initialled them, in token of (a) having compared quantities with the
measurement books, (b) rates with those specified in the tender submitted by the
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contractor and accepted by the society, and (c) having checked calculations,
extensions and totals of the bills (d) the work completed by the contractor is of assured
quality and quantity. The valuation certificate should mention specific items of the
work executed and value thereof, total value of the work executed so far, amounts
paid to the contractors upto submission of the bill, amount to be deducted on
account of supply of materials and retention money , necessary taxes and the net
amount of advance recommended to be paid. If additional amounts are to be paid
on account of materials purchased and stored at the site by contractor both
quantities and rates at which different materials have been valued should be
mentioned and the amount of advance paid against stocks of materials lying on the
site should not exceed 75 per cent of the value of the materials. All running
bills should be serially numbered and filed along with the architect’s certificates.
The running bills should also be checked by the accounts department as
regard rates, quantities, etc. Calculations, extensions and totals should also be
checked. Quantities mentioned should be compared with those mentioned in the
immediately preceding bill and it should be seen that increases are shown only
against items of works which are still in progress. In respect of completed items
of work, as for example, excavation for foundation, filling in and construction
upto plinth level, columns, slabs of lower floors, etc., the amounts shown against
these items in previous bills should have been repeated, since in respect of these
items , there would be no further progress.
6. Final bills and completion certificates.:- Final bills submitted by the contractor
should have been duly checked as to quantities, rates, calculations extensions and
totals, carry forwards and final total, by the architect who should also certify the
completion of the building and correctness of the cost incurred over the
construction. The architect also arranges to obtain the completion or occupation
certificate from the municipal authorities without which the building cannot be
occupied. Where buildings or godowns have been constructed out of Government
loan , after completion of the building, a valuation certificate is also required to
be obtained from the Executive Engineer of the State Government , or of the
Zilla Parishad or other Engineer ,as specified in the Government order sanctioning
the loan. The actual expenditure incurred and quantities should be compared
with the estimates originally prepared and the difference under different heads,
if material, should be inquired into.
7. Construction of buildings Departmental.- Where construction work is carried

on departmentally, the society itself buying materials and engaging labour, the
following points should be noted:--
(a) Layout plans and estimates should have been prepared by the architect and
approved by the general body.
(b) A qualified Civil Engineer or overseer should be appointed to supervise over
construction work. One or more mestries, works clerks or other assistants may be
appointed where construction work of considerable valve is undertaken.
(c) Attendance of labourers should be checked with the muster rolls, job cards, job
registers and supervisor’s Daily Reports.
(d) Payments of wages should be checked from the acquittance rolls, at the top of
which particulars of the works or job executed should be mentioned
(e) Purchases of building materials like bricks, cement, lime, iron and steel, timber,
etc., should be checked from suppliers’ bills, delivery notes, materials received
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notes and entries in the materials received register, building materials , are stored
in the open on the site. It is, therefore, necessary to appoint a watchman who will
attend to the safeguarding of materials . However, cement and building stores
like bolts and nuts, hinges, screws, nails, etc., should be stored in a godown or
closed room and should be under the control of store keeper, Purchases should
only be made against requisitions submitted by the Civil Engineer.
(f) A register showing receipts and issues of different kinds of building materials
should be maintained. All entries in this register should have been checked and
initialled by the Civil Engineer .
(g) Basis for allocation of wages, building materials and also supervision charges
including salaries of the building supervisor and Civil Engineer to different
buildings and other civil works should be ascertained.
8. Construction of godowns by co-operative societies.- In order to encourage

agricultural credit societies, marketing and processing societies to construct
godowns for storage of agricultural produce of members pending sale and also
chemical fertiliser, insecticides and other agricultural requisites , both the Central
and the State Governments have formulated special schemes for giving them
financial assistance both by way of loans at concessional rates of interest and
subsidies. During the course of audit, auditors will have to see that terms and
conditions subject to which the loans and subsidies have been sanctioned , are
complied with. It has also be noted that the amount of subsidy received is
credited to the Reserve fund and the full cost of the construction including cost
of the land should be shown on the assets side. If the actual cost of the godown
exceeds the amount of loan and subsidy received from Government, permission of
the Registrar for investments of additional funds in the construction of the
godowns as required under Section 70 of the Maharashtra Co-operative Societies
Act should be obtained
V-11 CAPITAL AND REVENUE EXPENDITURE
1. Treatment of capital expenditure.-- It is necessary that all capital expenditure

incurred should have been properly authorised. The resolution of the managing
committee / board or the order of the authorised officers sanctioning such
expenditure should be seen. Similarly, all major repairs and maintenance charges,
though not capitalised, should also have been sanctioned by the committee or the
authorised officer.
The expenditure capitalised should be added to the cost of the assets and
not for replacement, unless the asset itself is scrapped and a new asset acquired in
which case the sale- proceeds of scrap received should be credited to the account
of old assets and the cost of replacement debited to the account of the new
assets . The difference between the value of the old assets and the sale-proceeds
received should be adjusted to the profit and loss account. Where assets are not
acquired from an outside agency, but, have been created by the concern it self by
supplying materials and employing workers, it should be seen that the
expenditure capitalised is limited to the actual cost of the work done, i.e. the cost
of material and labour charges and only a reasonable portion of the factory
overhead. Administrative overheads should not be capitalised and no profit margin
should be charged.
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2 .Apportionment of expenditure between capital and Revenue.-- The distinction

between capital and revenue is of vital importance as it directly affects the amount
of profit or loss and the correctness of the balance sheet
Capital expenditure is all expenditure incurred for purpose of acquiring
assets of a parent nature by means of which the business is carried on or for
the purpose of increasing the earning capacity of the business.
Revenue expenditure is all expenditure incurred for carrying on the
business and in maintaining the capital assets in a state of efficiency.
The allocation of expenditure between capital and revenue calls for the
auditor’s careful examination. Where the expenditure is directly incurred for
capital purposes, it can be vouched during the course of examination of the
cashbook or Purchases Register. However, in many cases ,as for example, when an
additional wing is constructed to the building , the expenditure incurred is first
debited to the general revenue account such as wages, etc., and then transferred to
capital. In such cases, precise particulars should be obtained as to number of men
employed, nature of work, rates of pay, etc., and the portion thereof applicable to
capital. The Works Manager and other officers concerned should certify such analysis.
As regards expenditure on materials , schedules of all goods taken from the
store for such purposes, should be prepared by the store keeper and certified by
the Works Manager, value being calculated at cost price.
3. Vouching of capital expenditure- All capital expenditure should be very

carefully vouched, to ensure that payments are in order, have been properly
authorised and are proper capital charges. The question as to what documents will
have to be examined depends on nature of the payment. For example, where plant,
machinery, furniture and fixtures, etc., have been newly acquired , invoices and
receipts will be seen. Where adjustments have been made to revenue accounts in
order to segregate capital expenditure, inquiries should be made in order to
ascertain that the items to be capitalised are bona fide capital charges, have been
properly authorised and no repairs and expenses of manufacture are added to the
capital account. In addition to invoices price, carriage and other expenses connected
with the purchase can be capitalised. In case of plant and machinery, cost of
erection can also be properly added to the cost of machinery or shown separately
under the heading “Machinery Foundation”, or “Erection charges”. As regards
purchase of new buildings or addition made to existing buildings, the expenditure should
be verified by inspecting agreement for purchases, architect’s, engineer’s certificates,
supplier’s invoices, wages sheets and other documentary evidence that may be presented
to him for purposes of his audit. Where buildings are purchased the amount paid should
not only be verified by a reference to the solicitor’s statement, agreement and sale deed,
but a certificate regarding reasonableness of the amount paid should be obtained from a
qualified architect, qualified architect, qualified Engineer or Government Engineer. The
title deed and conveyance or the lease should be examined. If the buildings are in course
of erection, the auditor should examine the builder’s account, his running bills and receipt
and certificates of the architects or qualified engineers. Solicitor or architect’s charges will
be vouched from tier statements of accounts and theses expenses may be treated as being
part of the capital cost.
In case of societies, which have undertaken development of land and constructions
of building, viz., farming societies, housing societies, industrial estate, etc., the
expenditure incurred over development of the property may be allowed to be capitalized.
In case of farming societies, the entire expenditure incurred for developing land, levelling
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and constructing bunds and providing irrigation facilities, should be capitalized. In case of
housing societies and industrial estates, in addition to the cost of land, the expenditure
incurred over the development of land including construction of roads, drainage, provision
of electricity and water, division of land into plots and similar other expenses, may be
capitalized. In the case of tenant Co-partnership housing societies, not only the cost of
land, development charges and the cost of construction of the building, but also the
expenditure incurred for supervision over construction work and reasonable administrative
charges incurred during the period upto the date when the flat s are ready for a being let
out to members, may be capitalized.
In case of newly established societies , all expenditure incurred upto the date of
commencement of trading (i.e. Disposal of the first batch of finished goods) may be
allowed to be capitalised. In cases of processing and manufacturing societies, the entire
expenditure incurred including financial charges upto the date of commencement of
manufacturing activities may be capitalized. However, the expenditure capitalized should
be the net amount of the deficit after taking into account the income by way of interest on
surplus funds invested, sale proceeds of scrap and unused material, etc.
It the duty of the Auditor to verify additions to each type of fixed assets during the
year. During the course of his audit, the auditor should make it a point to inspect any
substantial capital addition to the assets, which have been made during the year covered
by his audit. This is desirable for satisfying himself about the reasonableness of the
expenditure, which has been capitalized. He would also be satisfied that the capital
expenditure incurred is represented by some tangible assets and is not merely fictitious or
replacement of an Old asset which has not been written off.
CHAPTER VI
VI-1 PREPARATION OF THE PROFIT AND LOSS ACCOUNT
1. Checking of posting into ledger: - while vouching the cashbook and the journal, the
auditor has to see that not only there is sufficient evidence in support of the entry, but the
entry itself correctly records the transaction. By careful vouching, the auditor will be able
to discover the nature of the entries in the cashbook and the other books of prime entry.
However, it should be noted that the ledger is the center of all accounts, since all the
transactions affecting the business are posted therein and the profit and loss account and
the balance sheet are prepared from the ledger. The auditor will, therefore, have to trace
carefully the entries from the cashbook and the journal into the ledgers and satisfy himself
that they have been posted to the correct ledger accounts. Ledgers are primarily divided
into two classes personal ledger and impersonal or general ledger. Accounts relating to
individuals are maintained in the personal ledgers and in the impersonal or the general
ledger, as it is more commonly known, aspects of the transaction as they affect the
business and not as they affect individual are recorded. The impersonal ledger is further
divided into two sections, on containing real or property accounts which record assets and
liabilities of the business and the other containing nominal accounts, which relate to the
profit and loss account. The impersonal ledger will, therefore, contain all accounts, which
record the operations of the business and at the close of the accounting period are
summarized into the trading and profit and loss account and secondly all account which
represent the assets and liabilities of the business. The auditor must, therefore, check the
whole of the entries in the general ledger. In fact, he can verify the correctness of the
personal account by agreeing their total with the balance of the concerned total or control
account maintained in the general ledger. It need hardly be pointed out that one of the
commonest methods of concealing manipulation in personal account is to make
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corresponding fictitious entries in the impersonal account either by opening a bogus

account or by posting the amount of nominal or total account in the general ledger. For
example the secretary of PACS has credited principle of loan in personal ledger, of
amount for which he has received actual cash, for canceling this entry, he has passed
the entry in general ledger, without recording cashbook, crediting anamat account and
debiting the principle of loan account.
Generally the expenses are debited by crediting Secretary or Chairman anamat
or anamat on the name of member who is relative of these officers, in the General
ledger; these entries are not recorded in the original books, i.e. cashbook or journal.
2. Checking of the General Ledger: As already stated, the entries in the general ledger
will all come from a book of prime entry, viz., the Cashbook or the journal. In most
societies, which do not maintain a separate journal, the cashbook is generally called the
Daybook. The total of all subsidiary book, viz., Purchase journal, Sales Register, and other
subsidiary cashbook are first entered in the Day Book and posted into the general ledger
from the Day book, although in some societies, posting from the subsidiary book are
directly made into general ledger. However, it is more usual to analyze the transactions
recorded in the subsidiary books according to their classes and post the total into the
Daybook under heads so classified and then posts them into the general ledger. In such
case, viz., where total amount have been analyzed and classified under various heads, the
auditor should check the analysis, reconcile the total amount and trace the individual items
comprising it into the general ledger. It should further be seen that all transfers from one
account in the general ledger to another account are passed either through the journal
or the day book and no amounts are posted directly in the account in the general or
personal ledgers without first being entered in the cashbook or the journal. The
narration below the entry should fully explain the origin and nature of the transaction and
the reasons for making the entry. Routine checking of posting is usually done by two
clerks or assistants working together, on calling out the amount form the cashbook and the
other repeating the amount after tracing the amount in the ledger account. Entries both in
the cashbook and the ledger should be ticked simultaneously.
3. Calling over of opening balances from previous year’s ledger: - After the whole of the
posting into the ledger have been checked, the auditor should examine each accounts in
the ledger in order to ensure that every item has been ticked. All the accounts in the
ledgers should be scanned for unticked items and should there be any unticked item, it
should be traced in the cashbook. The Cashbook and journal should also be scanned for
the same purpose. Thereafter, totals of both sides of the ledger account should be checked
and it should be seen that the closing balances have been correctly extracted. Opening
balances in the ledgers should be called over from the previous year’s ledgers. Since
closing balances of all nominal accounts are transferred to the trading and profit and loss
account and the accounts are closed at the close of the accounting period, there would be
no balances of nominal account in the general ledger. However, there would be certain
accounts relating to expenses and losses, which might not have, been completely written
off. The balances not written off are brought forward under heading, such as deferred
revenue expenditure, development charges, preliminary expenses etc. and are written off
against profits of future years. The opening balances of all real or property account and all
account in personal ledgers will, however, have to be called over from the previous years’
ledgers.
The non-checking of the opening balance will results in: Canceling of any asset or
liability, which is cancelled subsequently by creating fictitious assets or bogus liability.
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4. Drawing up of the Trial Balance: After checking the posting into the general ledgers
and extracting balances, all the closing balances are entered in a sheet separately according
as they are debit or credit balances. This statement, which contains a classified summary
or a list of all closing balances of general ledger, is known as the “ trial balance”. Since
the cashbook is also a ledger account (it being the cash account). The opening and closing
cash balances are also entered in the trial balance and if the totals of the two sides of the
trial balance agree, it signifies the arithmetical accuracy of the accounts. If the two sides of
the trial balance do not agree, it means that either the postings have not been made
correctly or the totals have been incorrectly taken. Hence, in order to trace the difference,
the whole of the posting and total, both of the general ledger and the cashbook will have to
be checked. However, in most cases, certain indication would be available after careful
examination of the difference, which would assist in locating the difference.
Some indications are 1) if the difference is 1,100, 1000, 9, 99, 999 and so on the
difference must be located by totaling, 2) the difference is of specific amount in odds there
must be mistake of living the amount of the same amount. 3) If the difference of specific
amount is there check in the trial balance the amount half of the same, which might have
posted at wrong side.
The difference should be located and the trial balance agreed before drawing up
the final accounts. However, the auditor should not proceed to prepare the final account
unless he is presented with an agreed trial balance. In the smaller societies, particularly
agricultural credit societies, instead of the trial balance, a receipt and disbursements
statement is prepared from the cashbook, which serves the same purpose.
5. Checking of journal – When transfer entries are passed through the cashbook itself,
both the credit and debit entries should be seen simultaneously. Such contra entries
should be marked with a special tick in order to distinguish them from other entries, which
involve passing of cash. All contra or transfer entries should be checked very carefully.
Because these contra entries do not affect the cash on hand and no cash actually passes
hands, there is a tendency to pass these entries without proper scrutiny. However, since
contras also create monetary obligations, they are as important as cash transactions and
should, therefore, receive due attention.
There are adjustment entries, rectification entries, and routine entries of payments
and receipts by transfer are recorded in the Journal. Auditors should take specific care
while checking the rectifying entries to check that the original entry is really passed in the
wrong manner. Adjusting entries are passed for provisions of expenses, prepaid expenses,
and pre-received income, and for the goods received but no bills are received and needs to
create payments entries. The entries are as follows.
Sr. No. Particulars Debited to Credited to
1 Expenses due for the Expenses account Expenses payable
accounting period, but are not account
paid requires provision such as
Salary, Audit fees, Interest,
commission, cadre
contribution, Education fund
contribution etc.
2 Expenses paid are for the Prepaid expenses Expenses account
period of future accounting account
period requires to provide i.e.
interest, Taxes paid, Insurance
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etc.
3 Income for the period Income Receivable Income Account
accounting period is not Account
received but due to receive i.
e. interest, Dividend,
commission etc.
4 Income received for the future Income Account Income pre
period requires to provide i.e. received account.
Rents, Taxes etc.
5 Deductions made from Expenses account Sundry payable
salaries, commissions, Interest account
such as Income tax deducted
at source, professions tax
deducted, various deductions
from salary etc.
6 Sales effected, but amounts Sundry Debtors account Sales accounts
are to be received
7 Goods received, but payments Purchase account Sundry Creditors
are till to be made. account.
While vouching entries in the journal or in the cashbook, the auditor should see
that not only there is sufficient evidence in support of the entry, but also that the entry
itself correctly records the transaction. It should further be seen that all transfers from
one account to another account in the general ledger from one personal account to
another, should be passed through the journal or through the cashbook and no posting
into the ledger should be made directly in the ledgers.
The narration below the entry contained in the transfer vouchers (both credit and
debit) should be gone though carefully and it should be seen that the entry has been
correctly passed.
6. Closing of nominal account – Unlike the auditors of joint stock companies, the auditor
of a co-operative society rarely finds that the books presented to him by smaller societies,
are written up-to-date and duly balanced. In most of the cases, before the auditor proceeds
to check the final accounts, he will find that necessary adjustments have not been made. In
many cases, particularly, in case of the small and smaller societies, the auditor is called
upon to advice balancing the books and making necessary adjusting entries for closing the
accounts. He may tender necessary Advice in the capacity as an expert accountant. It is
necessary to note that irrespective of the auditor advises to make adjusting and closing
entries or merely checks them; he must satisfy himself that these entries are necessary and
correct.
The closing entries for nominal accounts are
1) All expenses Credited and Debited to Profit and loss account and
2) All Incomes are debited and credited to Profit and loss account.
By these entries the balance of profit or loss is extracted and accordingly taken into
balance sheet.
7. Adjustment of nominal accounts- In every society, there are bound to be transactions

the results of which may not be known on the date of the balance sheet. In order to show
correct position of the society, it is necessary that all such overlapping transactions should
be taken into account and necessary adjustments made.
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All nominal accounts must be checked carefully by the auditor so that he should be
satisfied that all transactions of the business have been correctly classified and included in
the final accounts. In this connection, the auditor should take particular care to see that all
accrued income as well as the expenditure incurred, but not paid and income or revenue, in
addition to examining the entries in the books, the auditor has to satisfy himself that all
income, which should have been received, has been duly recorded in to. See that all sales
effected, particularly, sales made during the last few days prior to the date of final
accounts, to trace back the issue of dispatches of goods to the relative invoices or sales
memos. Similarly, during the course of inspection of securities and securities and other
investments, the auditor should ascertain whether all interest accrued due during the period
has been received and all divided declared is duly credited. Few such entries are shown in
the Para 5 above
8. Adjustment of outstanding expenses - As regards outstanding payments, the auditor

should examine the “ Good Inward Book ”or the “ Invoice Register “ for the last few
weeks of the period and satisfy himself that all purchases made and included into stock
have been duly brought into account and the amount of the unpaid invoices credited to the
respective accounts of the suppliers of the goods. In addition to purchases not paid for,
expenses incurred but not paid, are also required to be brought into account. Many times,
bills for supplies made and service rendered are not received from the suppliers and other
creditors. For example, the transport contractor might not have submitted his bills for
goods transported during the last few days of the year. Similarly, solicitors and other
consultant might not have submitted their bills for professional services rendered to the
society during the period covered by the audit. In most of the societies, salaries and wages
for March may not have been paid before the close of the year. All these items will have to
be brought out as the outstanding expenses. Special attention should be given to the items
discussed in the following paragraphs.
The society should be advised to maintain an accrual ledger in which the accounts
of such outstanding items would be maintained. This would facilitate the comparison of
the amounts provided during the current year with those of the previous years and the
auditor’s attention should be drawn to any items, which might have been overlooked.
Where no accrual ledger on the above lines has been maintained, the auditor should
examine the last year’s journal and ascertain what adjustments in respect of outstanding
items are required to be made.
9-(i) Interest payable- Interest on bank loan and other borrowings is generally debited to
the account of the society. However, in case of deposits and other temporary borrowings,
interest accrued upto the date of the balance sheet should be calculate and provided for. In
particular, interest on fixed deposits accrued from the date of last payment of interest upto
the date the balance sheet should be calculated.
(ii) Interest on saving Bank account- this is ordinarily calculated and credited to the
accounts of the respective depositors, before the close of the year.
10. Outstanding expenses - All nominal accounts in the impersonal ledger should be
examined to see that all expenses and charges pertaining to the period under review have
been included. There may be, for example, outstanding bills for repairs, fuel charges,
electricity charges, water charges, etc., and also transports charges, godown rent,
subscriptions, advertisements etc. The auditor should further inspect the ledger account,
any accrued and unpaid proportion from the date of last memo till the date of the balance
sheet noticed during the inspection of these documents is provided for. The amounts paid
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under these headings should be compared with those appraising the corresponding
nominal accounts for the previous year so as to ensure that all rents, rates, taxes, etc.,
payable have been duly provided for.
11. Prepaid expenses - Just as there are outstanding liabilities on account of expenses,
there may also be advance payments or prepaid expenses as they are called. Under this
head. Will be included rents, rates and taxes, insurance premium, advertisement charges,
subscriptions, membership fee, etc. paid for periods that extend beyond the date of balance
sheet. The auditor should examine the nominal accounts and also the demand notices bills
and receipts and sees that correct calculation has been made of the proportion the amounts
relating to the un-expired periods.
12. Income receivable – There might be various amount due to the society for which
credit will have to be taken. These will include interest on loans and other advances made
by the society, interest or divided on investments, rent receivable for premises hired out,
royalties, commission, etc, receivable. Interest on loans and advance accrued upto the date
of the balance sheet should be calculated and brought into account However, since divided
does not become due until it is declared, no credit should be taken for dividend on shares
undeclared of dividend has already been made. Sometimes, rebates and bonus share also
receivable. However, these should not be taken credit for unless the society has been
informed that they have accrued and would be paid in due course. All items in the general
ledger relating to income should be scanned carefully and inquiries should be made as to
whether any amounts are receivable. However, no credit should be taken of amounts,
receipt of which is considered doubtful, unless adequate prevision is made therefore. As
regards outstanding interest on loans and advances, this has been treated separately.
13. Deferred Revenue expenditure – Many times, heavy expenditure is incurred, the
benefits derived from which would extend to periods beyond the date of the balance sheet.
It is; therefore, equitable that the expenditure incurred should be spread over a period of
years during which the benefits of the expenditure would be available. For example, heavy
expenditure might have been incurred on advertisements the benefits of which would be
derived in future years. Similarly, considerable expenditure might have been incurred over
development and also expenditure over research and experiments, alteration to premises
and equipment and heavy repairs might have been also made. The auditor should examine
carefully the whole of the circumstances in order to satisfy himself that the carry forward
of part of such expenditure is fully justified.
VI-2 DRAWING UP OF THE PROFIT AND LOSS ACCOUNT
1. Division of the Profit and Loss Account into three sections- In the case of co-operative
banks and other institutions, the profit and loss account will contain all the items relating
to the income and expenditure of the institution. However, in case of trading societies such
as consumers’ societies marketing societies etc. the Profit and Loss Account has to be
divided into two sections, the first relating to trading operations and the second the Profit
and Loss Account proper. In case of manufacturing and processing societies, there would
be three sections, the fist section being styled as manufacturing or production account, the
second and third sections will be the trading and profit and loss account respectively.(as
per note below ‘N’ form of profit and loss account) The basis upon which the
manufacturing, trading and profit and loss account are prepared, is explained in the
following paragraphs.
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2. Manufacturing account – The object of the manufacturing account is to show the

manufacturing cost of the goods produced. As such, the manufacturing or production
account will contain only items relating to the manufacturing operations of the society.
The main heads under the manufacturing expenses are shown as under
(1)The work in progress or value of unfinished goods at the beginning of the year.
(2) Raw materials used (opening stocks plus purchases minus closing stock )
(3) Fuel, oil, electricity and other power charges.
(4) Stores and spare parts consumed.
(5) Direct or indirect labor.
(6) Maintenance of factory building, plant and machinery tools and other equipment’s.
(7) Insurance of factory building, plants and machinery and tools stores, etc.
(8) Depreciation of factory building plant, machinery looses tools and other equipment.
(9) Factory heating lighting and water charges.
(10) Rent, rates and taxes of the factory premises.
(11) Salaries of the technical staff and officers including works manager, factory
superintendents, etc,
(12) General administrative expenses strictly pertaining to the factory.
Form the total of these items, i.e., the total of works in progress or unfinished goods in the
beginning of the year and manufacturing expenses incurred during the year, the value of
the work in progress at the end of the period is deducted and the results give the
manufacturing cost of the goods produced during the period, which are available for sale.
This figure is brought down to trading account-
3. Trading Account – In the trading account , the opening stock ( value of finished goods
at the beginning of the year) appears at the fist item. The cost of goods purchased, which
would also include all expenses connected with purchases, or manufactured appears as the
next item and there after all trading expenses are debited to this account. In case of a
manufacturing business, the cost of goods manufactured brought down from
manufacturing account takes the place of purchases. This account is credited with the net
sale proceeds received (total sales minus returns) and value of closing stock. The
difference between the two sides, viz., net sale proceeds received minus cost of goods sold
which would include selling expenses, will show gross profit. This gross profit is brought
down to the credit of the profit and loss account. Whereas the object of manufacturing
account is to show the manufacturing cost of goods produced during the year, which are
available for sale, the object of the trading account is to determine the gross profit which is
the difference between the sale proceeds received and the cost of goods sold. In the
trading account of trading societies, in addition to the invoice price of the goods
purchased, direct charges such as carriage and freight, insurance, godown rent and other
expenses connected with the purchase and storage of goods are included. In some of the
societies, particularly in consumers stores rent of shop premises and also salaries of
salesman and other staff directly engaged for selling goods are also shown in the trading
account. Adjustments, however, will have to be made for the value of opening and closing
stocks before arriving at the figure of gross profits.
4. Profit and Loss account proper – The third section of the profit and loss account is the
profit and loss account proper. This account is credited with the gross profit brought down
from the trading account together with any miscellaneous income such as cash discount,
interest rent, dividend, share transfer fees, commission, etc. On the debit side, the various
items of expenditure are grouped usual under the following heads: -
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(i) Selling and distribution expenses.

(ii) Administrative charges including audit fees, legal charges, etc.
(iii) Financial charges.
(i) Selling expenses – The selling and distribution expense include cost of packages
and packing materiel used, labour employed for packing goods, carriage fright, insurance
and other charges incurred for dispatch and delivery of goods to customers where these are
not to be charged to the customer, home godown delivery expenses (in case of consumers’
societies) expenditure incurred over advertisement and publicity, cost of samples, printing
charge of catalogues, price and lists and other publicity material, salesmen’s salaries and
commission and their expenses, bad debts and sundry trade expenses are also shown
under this heading.
(ii) Administrative expenses - Administrative charges include overhead expenses
such as –
(1) Clerical and accountancy charges.
(2) Printing and stationery.
(3) Postage telegrams and telephone charges.
(4) Office rent rates, insurance Office lighting and heating.
(5) Office lighting and heating
(6) Director’s sitting fees and expenses.
(7) Managing Director, Manager’s salary and cost of requisites and allowances.
(8) Audit fees and legal charges and other general expenses.
(iii) Financial charges include –
(a) Cash discount.
(b) Interest on deposits, loans, bank overdraft and other borrowing.
(c) Bank charges including discount charged on bills collected or discounted.
(d) Provision made for payment of income – tax is also sometimes included in the
profit and a loss account. However, this has been dealt with in a subsequent paragraph.
(e) Depreciation on office furniture and equipment. Also depreciation on building,
godowns, etc. where these are owned by the society.
5. Revenue Account of Income and expenditure Account- In case of non-trading

societies, such as co-operative societies, clubs and also federations, housing societies and
similar other societies which do not undertake trading activities, it is common to term the
“ Profit and Loss Account ” as “ Revenue Account ” or the “ Income and Expenditure
Account “ However, the principles for preparing the Revenue Account or the Income and
Expenditure Account are the same, the object being to disclose the excess of income over
expenditure or the deficit incurred during the period.
5.A) Profit Appropriation Account: Section 65 and Rule 49 A and 51 provides the
charges made to profit and loss account, and after arriving net profit how the appropriation
of profit should be made is described in Rule 50. After arriving the net profit the profit
should be appropriated as below.
Sr. No. Section Rule Particulars
1 65,66 Reserve fund not less than 25 % of the net profits or as
sanctioned by the Registrar, but not less than 10%
2 69 Fund created for charitable purposes including relief to
the poor, education, medical relief, and advancement of
any other general public utility, not exceeding 10 % of
the net profits.
3 65 Dividend to its members
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4 65 Bonus or honoraria to its members and honorary

workers, other than employees.
5 50 Development fund, Dividend equalization fund and any
other fund created under bye-laws
However in Joint stock companies the profit appropriation account is created for
the purpose of adjusting the Expenses and Incomes, which are not related to the
accounting period of the Company. Cooperative Societies does not prepare Profit
Appropriation Accounts, the above appropriations are shown by the societies, in their
annual report only. The auditors are required to guide the societies for preparing the profit
appropriation accounts in relation to the Income and Expenses which are not related to the
accounting period for which they are taking the audit, so that, the correct and fair position
of the profit and loss account would be arrived.
6. Auditor’s responsibilities as regard Profit and Loss Account. Scrutiny of Profit and
Loss Account- Under sub-rule (3) of Rule 69, the auditor is required to state in his audit
memorandum that the profit and loss account is in agreement with the books and gives a
true and fair view of the profit or loss for the financial year. Thus, he has not only to
certify that the profit or loss is not only correct according to the books, but also has been
calculated according to normally accepted accounting principles. The auditor’s
responsibility in certifying the correctness of the profit and loss account is great. It is a
fundamental concept of accounting that no dividend can be paid except out of profit and
the profit must have been earned before paying a divided. If, on the contrary, dividends
are paid out of capital and if this is not reported by the auditor, the auditor would be
held liable. It is possible that the profit of a business may not have been genuinely earned
and the accounts might have been manipulated to show profit in order to declare divided
and keep the shareholders satisfied.
7. Principles governing preparation of profit and loss account – Following are the
principles, which govern preparation of the profit and loss account: - Rule 49 A
(1) Adequate provision should have been made for depreciation, bad debts and other
losses,
(2) Stocks should have been valued on a correct basis,
(3) Interest overdue should not have been taken into account,
(4) Provisions of the Byelaws relating to the creation of Capital Redemption Fund,
Sinking Fund, Guarantee Fund and other funds should have been dully observed,
(5) Conditions laid down by the Government and the financing agencies regarding
creation and maintenance of these funds should have been complied with,
(6) Interest payable on deposits, loans, debentures and other borrowings should have
been calculated and brought into account.
(7) Capital profits and other extraordinary receipts should not have been taken to
profits,
(8) All expenditure incurred, but not brought into account should have been provided
for,
(9) Transfers to profit and loss account form funds created out of past profits should
not have been made.
These matters require careful attention and the auditor should look into above points
before certifying the correctness of the profit and loss account.
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8. Prior items or changes in accounting policies in respect of profit and loss account:
The Institute of Chartered Accountants of India has issued an Accounting Standard AS 5
regarding this.
The profit and loss account is prepared for a period on the basis of certain
fundamental accounting assumptions and reflects the accrual of revenues and related costs
for that period. In this context prior period or extraordinary items or those items, which
arise due to changes in accounting policies and are generally non- recurring in nature,
requires special consideration which effects on the true and fair position of the profit and
loss account.
The prior period items are specified by the institute is , “ material charges or
credits which arise in the current period as a result of errors or omissions in the
preparation of financial statements of one or more periods.” Such as the provisions
required for prudential norms (NPA) not adequately provided, which effect s in the next
period of the profit and loss account.
Extraordinary items are gains or losses, which arise from events or transactions
that are distinct from the ordinary activities of the business and which are both material.
Such as the sugar factories or banking societies are made income tax applicable will effect
the profitability of the society.
Disclosure of accounting policies (AS 1):- Generally the accounting policies are not
decided by the cooperative societies, however the conventions of accounting regarding
charging of depreciation, or providing expenses are followed by the societies till date, now
the act provides for adopting the accounting policies by the societies. Changes in these
policies makes material effect on the profit and loss account such as the society charging
10% depreciation on the computers changes the rate of depreciation at 33% will effect
materially, in case of banking societies, which are running their business on computers.
This will effect the profit and loss account.
Auditors are required to study the accounting standard and offer their comments
accordingly in the audit report.
9. Guide lines issued by the institute of chartered accountants – The following guide
lines issued by the Institute of Chartered Accountant of India in connection with the
preparation of the profit and loss account should be noted :-
(1) The profit and loss account should be made out as normally to disclose the result
of the working of the society during the period covered by the accounts.
(2) It should be clearly disclose every materiel feature including credits or receipts or
debits or expenditure in-respect of non recurring transactions of an exceptional nature
which should be separately
(3) Profit and loss account should clearly set out the various items relating to income
and expenditure of the society arranged under most convenient heads.
10. Form of the profit and loss account – The form of the profit and loss account is
prescribed under the rules and is required to be drawn up in from “N” accompanying the
rules .In the case of marketing societies consumers societies and other societies which
have under taken trading activities the profit and loss account is required to be dividend
into two parts showing separately the trading accounts and the profit and loss account
proper. In case of producers societies processing societies forest labourers’ societies and
other types of societies, which have under taken manufacturing activities, a separate
manufacturing account is required to be prepared. However, the form in which the
manufacturing account and the trading account are to be prepared, has not been prescribed.
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Hence, these accounts should be prepared in accordance with the generally accepted
principals. As already stated, the profit and loss account should clearly disclose the results
of the working of the society during the year. Every material nature and also
transactions of an exceptional nature are expected to be dealt within the report of the
committee. However, if this is not done, it is the responsibility of the auditor to point out
these in his report. (Please refer to Para 8)
Figures for the previous year are required to be shown in the profit and loss
account. These serve, as guide for the general scrutiny of the current year’s transactions
.An independent scrutiny of the comparative figures would indicate the changes in the
Business of the society. Enquiries should be made into the reasons for any material change
and commented upon.
11. Amounts to be charged to profit – Sub-section (1) of section 65, and Rule 49 (A)
which lays down the procedure for calculating net profit requires to be noted. The section
prohibits inclusion of overdue interests, i.e. interest accrued and accruing in accounts in
which the principle is overdue, in the amount of net profits. This means that only such
portion of unrealized interest, which in not overdue, should be taken to profit. The section
further lays down that a number of deductions should be made before arriving at the
figures of net profits. Besides, interests and establishment charges and other working
expenses including depreciation, provisions for a number other outstanding are required to
be made form out of gross profits. It should be seen that amount of net profit is calculated
correctly strictly in accordance with the provisions contained in the sub-section.
It is the duty of the auditors to see that the net profits have been calculated strictly
in accordance with the provision of section 65 and Rule 49 A (Registrar’s Circular No.
ADT/243(AM) dated the 3rd August 1964). It will be seen that the section prescribes not
only the mode of calculation of profits, but also appropriation of profits.
Rule 49 A provides the amounts that are charged to profit and loss account before
arriving of net profit are as under
i) all interest accrued and accruing on amounts of overdue loans (excepting over
due amounts of loans against fixed deposit, gold , etc,)
ii) Interest payable on loans and deposit:
iii) Establishment charges;
iv) Audit fees supervision fees, inspection fees;
v) Working expenses including repairs and maintenance, rent and taxes;
vi) Depreciation;
vii) Bonus payable to employee under the Payment of Bonus Act, 1965;
viii) Provision for payment of Income Tax;
ix) Amount to be paid for contribution to the cooperative education and training
fund, at the State Federal Society/ State Apex training institutes which may be notified by
the State Government in this behalf;
x) Provision for election fund for payment of election expenses;
xi) Provision for bad and doubtful debts;
xii) Provision for share capital redemption Fund;
xiii) Provision for Investment Fluctuations fund;
xiv) Provision for retirement benefits to the employees;
xv) Provisions for any other claims admissible under any; other law;
xvi) Provision for bad debts and revenue losses not adjusted against any fund
created out of profits;
xvii) expenses on advertisement, propaganda and publicity not exceeding than
celling limit as specified y the Registrar or State Government from time to time
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12. Rule 51: Further amounts to be charged to profit – Rule 51 and sub rule (2) of the
Rule 49 A specifies further amounts to be deducted form profits before arriving at its net
profits, in addition to the amounts already specified in Rule 49 A (2) . The following
amounts are required to be deducted by a society from its profits.
i) Contributions to be made to sinking fund or guarantee fund constituted under the
provisions of the Act, the rules or Byelaws of the society for ensuring due fulfillment of
any guarantee given by Government in respect of loans raised by the society.
ii) Provision considered necessary for depreciation in the value of any security, bonds
or shares, held by the society as part of its investments.
iii) Any provision required to be made for redemption of any share capital contributed
by Government or federal society.
13.Form “ N ” : From a perusal of Form “ N “, it will be seen that in the form of profit
and loss account prescribed under the Rules, all usual items have been included and the
major items have been grouped together under appropriate heads so as to give a fair idea
about the expenditure incurred over various items.
We shall now deal with the various items on the expenditure side of the profit and
loss account and the manner in which they are to set out.
(i) Interest payable – The amount to be debited to interest account will include
interest actually paid as well interest payable on deposits, loans and other borrowings.
Interest payable has been specifically mentioned in order that the management may not
fail to make adequate provision for interest payable on loans and deposits. The auditor will
have to check all items of interest payable at the time of his audit.
(ii) Bank charges – These are charges debited by the Bank on account of
exchange, commission, etc., charged for collection of cheques, remittances of funds, etc.,
cost of cheque books and pass books, postage and other charges for services rendered.
(iii) Contribution to staff provident fund- The auditor will have to verify with
reference to the Staff Provident Fund Rules that employer’s contribution has been
correctly made.
(iv) Salaries and allowances of the Managing Director – This point has been
discussed elsewhere.
(v) Traveling expenses and sitting fees paid to Directors/Managing committee
members- This has to be separately shown. The expenditure incurred under this head
should include expenditure and allowances for journeys undertaken even outside the
jurisdiction by the Directors/ managing committee members for the purposes of the
society. It should be seen that rates of traveling allowance, daily allowance, etc., paid to
members of committees do not exceed the maximum rates notified under Rule 107- A,
which are binding on the societies.
(vi) Traveling expenses of staff – All amounts payable need to be brought into
account.
(vii) Rents, Rates and Taxes – These should not only include amount paid, but
also the amount payable.
(viii) Postage telegrams and telephone charges. - No comments are called for.
(ix) Printing and stationery- No comments are called for.
(x) Audit fees. - Audit fees paid to Government for statutory audit as well as
fees paid to local auditors should be included under this head. However, if internal
auditors are appointed from the staff of society its own, the expenditure incurred on the
internal audit Department should be included under the heading “ salaries and staff ” and
should not be shown under the heading “audit fees”
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(xi) Bad debts written off or provisions made for bad debts- Bad debts actually
written off during the year and also provision required to be made for bad debts or the
contributions to be made to the Bad Debts Fund should be shown under this heading.
However, if bad debts are actually written of should be shown as a deduction from the
fund for the existing provisions and additional contribution made to the fund or provision
made should be shown under this heading. For banks provisions are required to be made
as per prudential norms issued by the Reserve Bank of India in this respect.
(xii) Depreciation on fixed assets - It is the duty of the auditor to see that
adequate depreciation is charged on all wasting assets. If the considers that the
depreciation charged is inadequate, he should state so in his report.
(xiii) Land Income and expenditure – If any agricultural lands are held by the
society, assessment and other expenses connected with the land should be shown under
this heading. Expenditure incurred over other property such as building plots, building,
etc., should be shown under the heading “Property income and expenditure account “ and
not under this head.
(xiv) Other items – All other items, which are not covered by the various heads
shown above, should be shown under this heading. All unusual items such as contribution
to sinking fund, depreciation in the value of investments, provision made for redemption
of Government share capital and such other items may be shown separately under the
appropriate heading and not under this head. Since every society, which employs 20 or
more persons, is required to pay bonus irrespective of whether it earns a profit or incurs
loss, this item will also appear in the profit and loss account on the debit side with an
appropriate sub-heading Rule 49 A (vii).
14. Income side of the profit and loss account- The following comments are offered on
the various items shown on the income side of the profit and loss account in N form:-
(i) Interest received and receivable from loans and advances to members and
interest received and receivable from investments – These are required to be shown
separately.
As regards interest receivable on loans, it should be noted that under provision of
sub-Rule (i) of Rule 49 A, all interest accrued or accruing in amounts, which are overdue,
is required to be excluded while calculating net profits for the year. As such, it is the
responsibility of the auditor to see that where interest receivable as taken into account;
adequate provision is made for overdue interest. Overdue interest may be shown either as
a deduction from interest receivable, or shown under thee separates heading of “
provision for overdue interest ” on the liability side. Either way, it has to be deducted
from the total amount of interest received and receivable. If any portion of the overdue
interest is realized during subsequent years, it may be included in the profits of that year.
(ii) Overdue interest – The following comments are offered in connection with the
provision of overdue interest.
Interest account appearing in the profit and loss account includes both interest
received and receivable. Interest received means interest actually realised during the year
in respect of whether it has accrued during the year or in previous years. Hence, interest
overdue, which was excluded from the profits of previous years, if realized during the
year, may be included in the profits for the year, in which it has been realized.
As regards interest receivable, it has to be noted that interest receivable would
include both interest accrued due and also interest accruing. Generally, recovery of
interest is made along with the principal and as such, when the loan account is settled, full
interest upto the date of repayment by the borrower is calculated and recovered along with
the balance of principal outstanding. However, in the case of medium term and long term
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loans, interest on the full amount has to be paid and any is recovered separately or along
with the installment of principal. Thus, in loan account, interests would have accrued and
would be accruing even when the principal has not become due for repayment. Hence,
unrealized interest on loans outstanding would consist of (a) interest which has accrued
and become due for payment and (b) interest which has been accruing but has not become
due repayment. Where the date fixed for repayment of loan and interest extends beyond
the date of balance sheet, the interest accrued during the period from the date on which
interest has already been calculated to the date of the balance sheet is termed as “ interest
accruing ” Both interest accrued and accruing may be taken to the profit and loss
account, provided the accounts to which they relate are not overdue. An account is said
to be overdue when the principal outstanding or the installment due has not been paid
on due date.
(iii) Interest on investment – As regards interest earned on investments, ordinarily
only interest actually received is taken to profit and loss account and further interest,
receivable up to the date of the balance sheet is not calculated and brought into account.
Where income –tax is deducted from interest, the gross interest could be shown as income
and amount of tax deducted should be shown as tax paid on receivable as the case may be.
Societies, which are not liable to pay tax on their income, should obtain exemption
certificate from the income-tax authorities.
(iv) Dividend received on shares- only dividend actually received should be shown
Dividend declared, but not actually received may also be shown. However, since dividend
does not become due until it is declared. No credit can be taken for anticipated income by
way of dividend.
(v) Commission – Commission received on purchases and sales made on behalf of
members, commission earned on insurance business and other commission may be shown
under this head.
(vi) Miscellaneous income - Where the society has undertaken other activities,
income received from these activities will be shown under appropriate heads. Thus, for
example, if the society purchased and kept for hire costly agricultural machinery and
equipment, such as oil engines, pumping sets, tractors, etc., hire charges received may be
shown under this head. Similarly, rent received on property, refund of taxes and fees and
other miscellaneous items may also be shown under this head. The various items of which
are to be included under this heading have been enumerated in form “N”
(vii) Land Income and expenditure Account – Where the society has come into
possession of agricultural land belonging to defaulters during the process of recovery of its
dues, a separate account styled “ Land Income and expenditure Account ” has to be
opened and all income received should be credited and all cultivation expenses including
cost of seeds, fertilizers, etc., and also assessment, cess and other taxes and fees paid
should be debited to this account. The net income received should be shown under this
heading.
15. Income and expenditure not related to accounting year

The society should prepare the accounts taking into accounts, accounting
standard no. 9 regarding income recognition and AS 5 regarding net profit or loss for
the period, prior period items and changes in accounting policies. The auditor should
see that the provisions made in both the standards are complied with and any material
deviation from the standard should be qualified in his audit report.
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CHAPTER VII
VII-1 PREPARATION OF BALANCE SHEET-VERIFICATION OF ASSETS
AND LIABILITIES
1. Balance sheet – The balance sheet is not a statement of assets and liabilities as are
considered by some of the auditors. It is merely a sheet showing the classified summery of
all the balance appearing in the books after the nominal accounts have been closed by
transfer to the profit and loss account and the balance of the profit and loss account. The
profit and loss account, to which are transferred closing balances of all nominal accounts,
is duly contained in the general ledger; but, there will be no such account styled as “
Balance Sheet ” in the general ledger. The balance sheet, no doubt, includes all the assets
and liabilities of the business; but, in many cases, it includes items on both the sides,
which are strictly speaking neither assets nor liabilities. Thus, for example, debit balance
of the profit and loss account appears on the assets side, although it is not an asset.
Similarly, expenses such as preliminary expense, deferred revenue expenditure,
development expenditure, etc., are shown on the assets side until they are written off, to
the profit and loss account over a period of years. These items also cannot be termed
“assets ” although they are shown on the assets side. Similarly, statutory reserve fund and
other reserves, credit balance of the profit and loss account, or similar other items
appearing on the liabilities side cannot to termed as “liabilities ” The balance sheet is
expected to show a true and fair view of the financial position off the society and, in
particular, it should show clearly the nature of all the assets and liabilities. However, since
the balance sheet includes other items as well, which are neither assets nor liabilities, it is
necessary that these items should be correctly described so that the whole position may be
clear. It is the duty of the auditor to satisfy himself that the balance sheet is properly drawn
up according to correct and consistent accounting principles. As we have seen, the main
object of preparing the balance sheet is to ascertain the financial position of the business
as on the date on which it is prepared and also to see whether the proprietor’s capital is
intact. In case of a co-operative society, the balance sheet will show the share capital
contributed by members and funds created out of past profits and how the entire capital,
which belongs to the members, is invested. In case of a private business, the proprietor’s
capital represents the excess of assets over liabilities. Similarly, in case of a co-operative
society, the excess of assets over liabilities would represent the share capital of members
and the retained profit.
2.Valuation of assets for purpose of Balance sheet – A comparison of the capital at the
commencement of the year and at the close of the year, would, no doubt, show whether
any profit has been made or loss incurred by the business. Where profit has been made,
there should be an increase in the capital and where loss has been incurred, the
proprietor’s capital would have been reduced. The profit and loss account merely amplifies
the information disclosed by the balance sheet and shows how this profit or loss has been
arrived at. Since the proprietor’s capital represents the surplus of assets over liabilities,
any increase or decrease of such surplus represents the profit or loss made during the year.
The ascertainment of the profit or loss will, therefore, depend entirely upon the value put
on the various assets. It is always possible to ascertain the amount of liabilities exactly,
except in case of contingent liabilities, such as claims under dispute, etc., However,
although the assets belonging to the business can be ascertained, verified and valued, it is
difficult in many cases to arrive at the correct amounts at which such assets should be
stated in the balance sheet. It was all along common for an auditor to mention in his report
that the various assets have been stated in the balance sheet as per the valuation made by
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the directors. The term “ valuation ” however, has different meanings. To a layman, the
term “value” would imply the amount, which the assets would realise, if sold or otherwise
disposed of. It is, therefore, incorrect to say that the assets are stated in the balance sheet at
a value in the above sense.
3.Meaning of Valuation – The term “ valuation ” in connection with the balance sheet
can be differently interpreted as under :-
(i) The value may be the estimated amount that the assets would realise, if sold
for disposed off, in other words, realizable value.
(ii) Value may mean the amount that is estimated the asset would cost to replace;
in other words, the replacement values.
(iii) The amount that an asset costs when purchased or acquired less the
provisions made for depreciation, since its acquisition. In other words, written down value
or going concern value.
(iv) The balance of revenue expenditure, which is being written off over a period
of years. This item will be shown under the heading “ deferred revenue expenditure ” or “
prepaid expenses ”
4.Going concern value – Although all the above basis for valuation may be used in
connection with the various classes of assets appearing in the balance sheet, ordinarily,
only the written down or going concern value is taken into consideration. It has, however,
to be remembered that there con not be true profits unless the original capital together with
the additions made thereto is intact. It is, therefore, imperative that where the asset in
which part of the capital is invested, is of a wasting nature or consumed in the course of
earning income, such wastage must be made good before true profit can be arrived at. For
this purpose, it will be necessary to estimate the working life of fixed assets like buildings,
plant and machinery etc., as already stated for purposes of preparing the balance sheet and
the profit and loss account, certain accepted conventional rules are adopted. By making
conservative provisions and by creating adequate reserves, well-conducted concerns leave
sufficient margin to provide against errors in calculating the net profits or incorrect
valuation of assets and also for unforeseen contingencies and undermined losses.
5.Verification : The Section 81 (2) casts the responsibility of verification of cash balance
and securities and a valuation of assets and liabilities of the society. Verification mean the
assets and liabilities are really in existence or not and they are conformity with the book of
accounts maintained by the society on the date of balance sheet. The term “Verification “
includes not only physical verification of the assets, but, it also includes comparing the
ledger account with balance sheet, they are owned by the business, assets are acquired for
the business, and they are properly valued.
6.Form of Balance Sheets Form “ N ” - Sub rule (2) of Rule 62 lays down that the
audited balance sheet and the profit and loss account to be laid before the annual general
meeting shall ordinarily be in form “ N ” accompanying the Rules. As we have seen, form
“ N ” has been divided into two parts. The first part contains the form of the balance sheet
and the second part contains the profit and loss account. The forms of the profit and loss
account and the various items appearing therein have already been discussed in the
previous chapter. In this chapter, we shall proceed to consider the form and contents of the
balance sheet.
The sub-rule, however, states that the balance sheet and the profit and loss account
should ordinarily be in form “N” which means that different types of societies may
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prepare their accounts in a slightly modified form to suit their special requirements. The
Registrar has also been empowered to permit a society or class of societies to adopt other
forms as he may deem fit. However, the form should broadly confirm to form “N” and
material changes will not be permitted. Co-operative banks coming within the purview of
the Banking Regulation Act 1949 have been permitted by the Registrar to prepare their
accounts in the form set out in the third schedule to that Act.
While preparing the accounts, specific instruction given as to how each item of
asset or liability is to be made out, should be scrupulously followed. These instructions
appear as marginal notes against the various items, these instructions are kind of
disclosures. The various items of assets and liabilities have been classified and grouped
under suitable heads. The assets appear in the order of their liquidity, viz., cash and bank
balance, which are most liquid appearing fist followed by investments and other current
assets, fixed assets and fictitious assets appearing last. The liabilities, however, appear in
the reverse order, share capital and reserves appearing first and liabilities and provisions
for credit balance of profit and loss account appearing last.
7.Auditor’s responsibility regards form and contents of Balance Sheet- Since the auditor
is required to report on the balance sheet and the profit and loss account, verification and
valuation of the various assets and ascertaining the nature and amount of the liabilities
constitutes one of the most important duties of the auditor. The various tests to be applied
and the procedure to be adopted for verifying and valuing the various assets and liabilities
normally adopted by auditors are explained in the following paragraphs:-
The management of the society is no doubt responsible for the form in which the
balance sheet and the profit and loss account are to be prepared and the amounts at which
the various items are to be shown. The auditor has no authority to alter the form of the
balance sheet or the values at which they are shown. However, if the form for the balance
sheet in materially different or the values shown are incorrect, the auditor should make
necessary comments in his report.
With the various item in the balance sheet grouped in the manner specified in form
“ N “, the salient aspects of the financial position of the society would be clearly brought
out. It can be seen at a glance, what is the total capital of the society and what portion of it
is invested in fixed assets and current assets and what portion thereof consists of intangible
items. A ratio of owned capital to borrowed funds and also to the total working capital can
be calculated which would indicate the financial stability of the society. Ratio of current
assets to current liabilities and also total liabilities can be worked out of ascertain the
ability of the society to meet its immediate and long-term commitments. Similarly, other
ratios can also be worked out which make comparisons possible.
As already stated, certain generally accepted accounting policies are followed in
arriving at the figures at which the various assets should be stated in the balance sheet. In
case of some of the assets, technical knowledge and judgments are necessary to make the
valuation. In most of the cases, an estimate plays an important part. No doubt, the
responsibility for this lies on the management of the society and not upon the auditor. The
auditor, however, is undoubtedly responsible to satisfy himself, so for as he reasonably
can, that the various assets are fairly stated in the balance sheet. He must also make certain
that the normally accepted Standard accounting principles have been adopted in preparing
the balance sheet and these have been consistently applied from year to year.
8.Classification of Assets for purposes of valuation - The assets held by a society vary
according to the type of the business conducted by it, since the auditor is required to
certify that, the balance sheet shows a true and fair view of the financial position of the
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society, it will be his duty to satisfy himself that the assets are not only in existence, but
have also been valued correctly. There are certain accounting policies, which are required
to be followed, for valuing the different kinds of assets, and the auditor has to see that
these accounting policies are consistently followed by management. We shall now deal
with the different kind of assets ordinarily held by co-operative societies and the methods
adopted for their verification and valuation.
For purposes of valuation, all assets are broadly classified into fixed assets and
current assets. There is also a third type of assets known as fictitious assets; i.e., assets
which are not represented by any tangible assets, such as goodwill, deferred revenue
expenditure, preliminary expenses, discount on issue of shares and debentures, etc. It is
not always easy to classify an asset as a fixed asset or current asset, since what may be
considered as fixed asset by one society may be considered as current asset by another; for
example, in a processing or industrial society, machinery would be a fixed asset while a
society, which manufactures or deals in machinery, it would be a current asset. The
classification would thus depend on the use to which the particular asset is put. However,
we may ordinarily consider those assets as fixed assets, which have been acquired for use
in the business for the purpose of earning income and not intended for resale at a profit
and conversion into cash in the normal course of business. For example, the plant and
machinery of a factory are held with a view to manufacturing with them for the whole
period of the working life of such plant. Current assets are those assets which are produced
or acquired by a business in the course of or for the purpose of its trading and consist of
cash, goods and such other assets as are held with a view to conversion into cash in the
regular course of business. Examples of current assets are stock in trade, work in progress,
debtors and other receivables, temporary investments and bank balance.
9.Verification of fixed assets. -Verification of fixed assets by the auditor would be carried
out by examination of the documents relating to their acquisition. A schedule of fixed
assets at the beginning of the year and fixed assets acquired during the course of the year
should be obtained and checked with the fixed assets register. It should be seen that all
articles scrapped, destroyed or sold have been duly brought into account and their written
down values adjusted. As regards physical examination of plant and machinery and other
fixed assets, the auditor should see that, this is carried out periodically. A certificate
should also be obtained from the management that, all items scrapped, destroyed or sold
have been duly recorded in the books.
10: Accounting standard for fixed assets (AS 10) :- The Institute of Chartered
Accountants of India has issued a Standard regarding fixed assets, which states that ,
The statement is applicable for the assets which are valued on the historical cost
basis, and does not apply to forest , plantation and similar regenerative natural resources,
wasting assets including mineral rights, expenditure for exploration or extraction of theses
assets, and other not regenerative resources like oil, Gas, expenditure on real estate
development and livestock, which are considered separately. The fixed assets is defined
as, ‘ an asset held with the intention of being used for the purposed of production or
providing goods or services and is not held for sale in the normal course of business.”
11.Cost and valuation of Fixed assets: The cost of fixed assets is determined on the basis
of purchase price and cost for acquiring the assets. The financial cost ( deferred credit) or
cost of borrowed fund attributed for acquiring or the completion of construction of the
assets is also included in the total cost. The interest cost after use of assets should not be
capitalized.
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In case of self-constructed assets, the allocation to the cost should be the total costs
that relates directly to the specific asset.
When the asset is replace by another asset, the fair value of old assets should be
deducted from the new asset.
The additions to the asset, if the addition increases the benefit from the existing
assets beyond its previously assessed standard of performance, should be added in the
book value of the concern asset.
The material realised for the asset replaced or discarded should be shown at the net
book value that is netting of depreciation and wear and tears, and net of realisable value,
which is less.
When the assets are discarded and are of no use, or beneficial for the business, the
total value should be eliminated. Losses arising form the retirement or profit earned should
be carried to the profit and loss account.
In case of hire purchase assets , while purchase value should be taken into account,
and if it is not available it should be calculated on the basis of rate of interest charged for
the assets while purchasing it.
The assets, which are jointly purchases by two or more societies, the prorata value
should be accounted for.
Where several assets are purchased for a consolidated price, the value of each asset
should be separated from the competent valuer and shown accordingly.
Goodwill should be recorded only if there is any consideration is paid for it.
In case if the society purchases whole business of another society, the net worth of
the business and the value paid for the acquiring the business, the value is excessive of net
worth the excessive value should be treated as goodwill.
In the case of patents direct cost incurred in developing the patents should be
treated as the value of the asset.
The amount paid for the know-how for the plans, layout and designs of building
and or design of the machinery should be directly added in the value of respective assets.
12.Revaluation of assets: The cooperative societies are not revaluing their assets, but
some sugar factories have revaluated their assets with permission from the State
Government. However, while revaluation the class of assets should be revaluated, or an
asset should be selected on systematic basis. The basis of selection should be stated, in
financial statement.
The revaluation value while revaluating the asset should not greater than its
realisable value. while upgrading the revaluation the accumulated depreciation should not
be credited to the profit and loss account on the date of valuation.
The credit balance after revaluation i. e. the differential value between book value
and revaluation value on the date of valuation should be strait way credited to the “
Revaluation Reserve account,” and there is decrease it should be charged to the profit and
loss account.
At the time of disposal of revaluated asset, the difference between net disposal
value and the net book value should be charged or credited to the profit and loss account ,
except, that to the extent such a loss is related to an increase which was previously
recorded as a credit to the revaluation reserve and which has not been subsequently
reversed or utilized, it may be charged to the profit and loss account directly.
13.Disclosure: The standard accounting policy requires to state the society gross and net
book values of fixed asset s at the beginning and end of an accounting period showing
additions, disposals, acquisitions and other movements. Expenditure incurred on account
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of fixed assets during the course of construction or acquiring and revalued amount
substituted for historical costs of fixed asset, method of revaluation, basis used for
revaluation, in which year the revaluation is made, and the nature of valuer.
14.Disclosure as per Cooperative Societies Act: As per Rule 62 the N form balance sheet’
marginal notes states that there should be mention of to every asset that, “ Under each
head of the original cost and the additions thereto and deductions there from made during
the year and the total depreciation written of or provided upto the end of the year should
be stated.”
15.Current assets : Classification of current assets- Current assets are ordinarily

classified under the following main heads for purpose of balance sheet :-
(1) Interest accrued on investment and loans.
(2) Stock in trade in case of trading concerns.
(3) (i) Stores and spare parts.
(ii) Loose tools.
(iii) Semi-finished goods work in progress and finished goods in case of
manufacturing concerns.
(4) Loans outstanding and sundry debtors
(5) Cash and bank balances
Interest accrued on investments should be shown separately in the balance sheet
and the basis of its computation should be ascertained. While computing interest
receivable, overdue interest should have been made for the same. Physical verification of
all stocks on hand and also work in progress will have to be carried out. For verification of
loans outstanding and sundry debtors, ledger accounts and balance confirmations will have
to be seen. Cash on hand should be counted and balance certificates will have to be
obtained for all bank balances. The methods adopted for verification of different assets is
explained in the following paragraphs: -
16.Fixed assets and depreciation - It has first of all to be noted that the value of fixed
assets shown in the balance sheet does not indicate its realizable or replacement value, but
represents the original cost of the asset which has not been charged to revenue in the year
in which it was acquired, less amount written off to revenue by way of depreciation year
after year. In other words, fixed assets appear in the balance sheet at their historical cost
less depreciation to date. It is, therefore, the duty of the auditor to satisfy him that the
amounts, which have been written off as depreciation, are adequate. There are various
methods followed for providing depreciation, but the one most commonly followed by co-
operative societies, is the straight line method under which the same amount it written of
every year during the estimated life time of the asset (i.e. .its usefulness to the business) at
the end of which it is completely written off or appears at its scrap value in the books.
Certain co-operative follow the “ reducing balance ” method under which the agreed
annual rate is applied in the first year and thereafter to the written down value after
deducting the depreciation provided in previous years. There is also a third method under
which the assets are revalued every year.
17. Depreciation – Whether based on the historical cost or re-valuation, should be so

calculated as to write off the assets over its expected normal useful life, irrespective of
whether any allowance, initially or annually, granted by the income-tax authorities. The
rates of depreciation, which should be applied, would depend upon the situation of the
asset, its nature its expected life of usefulness its residual or scrap value, the degree of use
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to which it is being put and risk of obsolescence. Where shift working is normal as in the
case of sugar factories, spinning mills, etc., it would be necessary to increase the rates of
depreciation. The main criteria for charging depreciation should however, be the expected
life of the asset and its scrap value after the period of its useful life. Whatever method has
been adopted for calculating depreciation it requires to be consistently followed and any
departure there from will have to be pointed out by the auditor. Normal depreciation is a
charge on profit and under Section 65 (1) and Rule 49 A (vi) of the Maharashtra Co-
operative Societies Act, depreciation has to be debited before calculation net profits. Even
where no profits have been made or the profits made are inadequate, normal
depreciation must be charged so as to show the correct amount of loss incurred.
If no provision is made for depreciation in respect of any fixed asset, the fact that
no provision has been made will have to be stated by way of a note. Since adequate
provision of depreciation on a consistent basis vitally affects the profit and loss account
and the balance sheet, it is necessary that any departure from the normal practice
should be inquired into if necessary, clearly brought out by way of a note or in the
auditor’s report.
It may also be noted that whatever method is adopted for calculating depreciation,
the income –tax authorities take into consideration the standard rates prescribed by them.
Hence the balance sheet provided to that authorities, and submitted to Annual General
body meeting may differ to that extent.
Byelaws of some of the societies contain specific provisions laying down rates at
which depreciation should be charged on different assets. These rates may be applied
where appropriate. However, where no provisions have been contained in the Byelaws, the
rates admissible for income-tax purposes should be applied. Where rates have been
specified in the Byelaws, but these are not considered adequate or otherwise unreasonable,
the auditor should suggest suitable amendments to the Byelaws. It has, however, to be
noted that the rates once applied should be continued. Where there is a change in the basis
of providing depreciation or the rate applied, the auditor should mention it in his report.
18. Accounting standard - Depreciation accounting (AS 6): The Institute of Chartered
Accountants of India has issued a Standard regarding depreciation, which states that ,
The statement is applicable for all the depreciable assets and does not apply to forest ,
plantation and similar regenerative natural resources, wasting assets including mineral
rights, expenditure for exploration or extraction of theses assets, and other not regenerative
resources like oil, Gas, expenditure on research and development, goodwill and livestock,
which are considered separately. The standard also is not applicable to the lands except
which not meant for the limited life i.e. lease hold lands. For this separate accounting
standard has been issued by the Institute.
Various accounting policies are applied by the societies to charge the depreciation
are already explained in the above Para 11.
19.Definitions: 1) Depreciation: The depreciation is defined by the Institute as, “

Depreciation is a measure of the searing out, consumption or other loss of value of a
depreciable asset arising from use, efflux ion of time or obsolescence through
technology and market changes.
2) Depreciable assets are (a) assets which are expected to be used during more than one
accounting period; and (b) have limited useful life, and (c) are held by the society for use
in the production or supply of goods and services, for rental to others, or for
administrative purposes and not for the purpose of sale in the ordinary course of business
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3) Useful life: is either period over which a depreciable asset is expected to be

used by the society; or the number of production or similar units expected to be obtained
from the use of the asset.
4) Depreciable amount of a depreciable asset is its historical cost, or other
amount substituted for historical cost in the financial statements, less the estimated
residual value.
5)Accounting Standard:
Depreciation amount should be allocated to expected life on a systematic basis, by
selected method and consistently for period to period. Change in the method should be
disclosed in the financial statement, with there effect on the financial statements, i.e.,
Balance sheet and profit and loss account.
If a new method of depreciation is selected and charged accordingly, for
requirement of statutory provisions, or other wise appropriate for the business, the result
should be disclosed. Due to change in method, the unamortised depreciable amount of the
asset should be charged to the profit and loss account for the remaining period of life of
the asset, by applying new method.
The useful life of the asset should be considered on the basis of expected physical
wear and tear; obsolescence; legal or other limits on the use of the asset. This should be
reviewed periodically. After revision if it is found that, the estimated useful life of an asset
the unamortised depreciable amount should be charged over the revised remaining useful
life. This should be disclosed.
Extensions and additions are also charged depreciation for the remaining useful life
of the asset , on the rate applied to that asset, to which the additions or extensions are
made.
When the depreciable asset is revalued , the provision for depreciation should be
based on the revalued amount and on the estimate of the remaining useful life of such
asset.
6. Disclosure: The financial statement should state, (a) the historical cost or other amount
added to that cost, of the such asset; (b) total depreciation charged to the asset or each
class of assets; (c) related accumulated depreciation of such assets; (d) depreciation
method used. (e) depreciation rates or the useful lives of the assets. (f) Basis of rates as per
statue or as per byelaws of the society.
20. Valuation of different types of assets – We shall now proceed to consider the methods
adopted for valuation of various types of assets-
(i) Goodwill – It is not common to find goodwill as an asset in any of the
established co-operative societies. However, where a co-operative society is formed to
take over an existing business owned by private parties, it may be necessary to pay some
compensation by way of goodwill to the existing proprietors of the business. Thus, where
the market value of the assets acquired is less than the amount paid to the vendors, the
excess amount paid will have to be shown as goodwill in the balance sheet of the newly
formed society.
It may not be possible for the auditor to verify the correctness of goodwill, which is
assumed to be capital value of extra profits, which an average business would earn on the
capital, employed. The goodwill is thus an intangible asset although it may not be a
fictitious asset inasmuch as its existence can be verified. From the Auditor’s point of view,
he will only have to see that its value is written down annually out of profits, in
accordance with the resolutions passed by the annual general body or by the managing
committee. Agreement with vendors of the business relating to purchase of the various
assets consideration to be paid the form in which it is to be paid, etc., will have to be
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inspected. Where the consideration paid exceeds the market value of the assets acquired,
the excess amount paid will have to be treated as goodwill. Accounting standard regarding
Goodwill has been explained above.
(ii) Patents – Such types of assets are not ordinarily possessed by co-operative
societies. However, where they have been acquired, it should be seen that they are written
off during the course of their expected life. It is also necessary for the auditor to see that
annual renewal fees are paid every year. The auditor should study the provisions of Indian
Patents and trademark Act. regarding the estimated life of the such asset.
(iii) Trademarks – Verification of trademarks can be made by inspection of the
certificates of registration and / or any assignment of the trademarks.
(iv) Copyrights – These will be acquired only by co-operative publication, societies.
The valuation should have regard to the prospect of the future sales, if the entire amount is
not immediately written off. As for as possible, these assets should not appear in the
balance sheet for a period longer than 2 or 3 years.
The above four assets are known as intangible Assets as they are not to be seen
or touched. While examining these assets the auditors should take care that, what the basis
on which such assets were originally valued. Which procedure for writing off of these
assets is applied by the society. Whether they are presented fairly and adequately in the
Balance sheet. There is proper control on income generated by these assets and it is
accurate and completely taken in to accounts. The ownership of the assets should be
verified. The assets are recorded consistent with accounting policies. These assets should
be shown separately.
(v) Freehold lands and building – Verification is by way of inspection of title
deeds. It should be seen that the title deeds are in order. The sequence of the conveyances
should be examined to ensure that the last conveyance is in the name of the society. Also,
extracts from the land records (update 7/12 extract, khateutara, index II etc.) , such as
village record of rights or the city survey or the Municipal records should also be seen
should be in the possession of the society. Unless the lands and buildings are mortgaged in
which case a certificate to that effect should be obtained from the mortgagee.
As regards valuation, the cost of the lands and buildings can be ascertained from the
sale deed or the architect’s certificate. Contractor’s account and the certificate of
completion should also be seen where buildings are constructed by the society.
As regards expenditure incurred over construction of roads, digging of wells, planting
trees, etc., the same should be verified from the vouchers. Expenditure incurred over the
maintenance of roads, gardens, play grounds, etc., should be debited to revenue. Only the
cost incurred over the original construction should have been capitalized.
As regards depreciation, it has to be noted that freehold land does not generally
depreciate in value. As such, the question of charging depreciation to freehold lands does
not arise.
As regards leasehold lands, the valuation can be ascertained from the lease deed,
or the assignment thereof, which should be inspected by the auditor during the course of
his audit. It should be seen that, all the terms and conditions laid down in the lease
agreement such as insurance of property and payment of insurance property and payment
of insurance premium, rent, rates and taxes, proper maintenance of the property, etc., are
complied with. The valuation will be made with reference to the original cost so that every
year and adequate amount is written off so as to bring the value to ‘Nil’ at the end of the
life of the lease.
(vi) Plant and machinery- Purchase of new plants and machinery will be vouched
during the course of audit. In addition to invoices and receipts, the correspondence
regarding the purchase and also contracts with machinery manufactures and engineer’s
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certificates will have to be seen. As regards physical verification, where there are only a
few machines, they should be personally inspected and identified by the auditor. However,
where the number of machines is large and also where it is not possible to identify
individual items of machinery, the auditor should obtain a schedule of plants and
machinery. A certificate of their existence and efficient working should also be obtained
from the Works Manager or other responsible technical officer. The mode of valuation
should be the original cost less depreciation. Where the machinery or other equipment’s
is purchased under a hire purchase agreement or an agreement to pay by installments
(deferred payments system) the depreciation should be calculated on the full cost price of
the machinery and not on the amount of installments paid to date. (AS 10)
(vii) Loose tools and tackles- the expenditure incurred over additions will be verified
from the vouchers. At the end of the year, fresh valuation of all the tools should be made
every year and the difference between the opening balance plus additions during the
year less closing balance should be written off as depreciation. The basis for valuation
should not be the current or realizable value, but the estimated cost less an adequate
allowance for wear and tear.
(viii) Dead stock, furniture and fixtures, installations, and fitting - Dead stock and
furniture, including office equipment should be dealt with as in the case of plant and
machinery and adequate depreciation should be written off every year, based on the
working life of the different items. Items, such as safes, cupboards, tables, etc., have long
working life, but fixtures and fittings, such as electrical installation, partitions, etc, have a
short working life. In the case of fittings upon leasehold premises, the entire cost should be
written off during the period of the lease or their estimated working life, whichever is
shorter. A list of dead stock articles and office equipment should be obtained and the total
agreed with the amount appearing against the item in the balance sheet.
(ix) Library books – Cost of newspapers, periodicals and even books is generally
debited to the profit and loss account under the heading “trade expenses ” or “
miscellaneous expenses” and do not appear as an asset in the balance sheet, unless the
amount invested is considerable. However, purchase of costly books, particularly,
reference books and technical books, may be capitalized and shown under the heading “
Library books ”. A register of library books should be maintained irrespective of whether
the cost of the books has been debited, to revenue account or capital account. The Register
of library books should be inspected at regular intervals and the physical existence
verified. A list of library books, the cost of which has been capitalized should be obtained
and agreed with the amount appearing on the balance sheet. It should be seen that cost of
old and outdated books, in particular, law books, is written off.
(x) Motor vehicles- the cost of new vehicles purchased should be vouched at the
time of checking purchases. Registration books should be examined. All vehicles should
be identified by their registration numbers in the accounts and in the list of motor vehicles,
which should be necessarily obtained at the time of audit. Where a fleet of vehicles is
owned by the society, it will be necessary to keep separate account of each vehicle. The
expenses incurred over repairs and maintenance should be allowed to be carried over for
one or two years so as to spread over the benefit of the expenditure over the periods for
which it is availed of. As regard valuation the method adopted is original cost less the
aggregate depreciation. In special circumstances, such as accident, etc., a special
depreciation will have to be charged.
(xi) Live stock – A register of live stock, showing date of acquisition, identification
marks or name, price paid depreciation charged etc., should be maintained. Every animal
should be identified by registration number or by its name, where there are only a few
animals. The basis of valuation should be re-valuation at the end of each year. In the
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case of animal, such as working bullocks, milch cattle, etc., their working or useful life
and their usefulness to the society should be taken into consideration. It has also to be
noted that calves, heifers and other young animals appreciate in value, as they grow old.
It should be seen that necessary adjustments are made on the death or disposal of any of
the animals.
VII-2 VERIFICATION AND VALUATION OF

CURRENT ASSETS-
1.Investment – An investment ledger should be maintained recording all transactions

relation to individual investments. At the top of each ledger account, necessary particulars
regarding date on which interest or dividend become payable, scripts, right and right issues
attaching the investments, etc., should be duly recorded. There should be separate columns
to show the gross interest or dividend received tax deducted at source and net amount
received. Where no income is received during the year in respect of any investment,
inquiries should be made. Arrangements made for the physical control of the securities
should be examined. Physical control over the securities and other investments should be
with a responsible officer other than the officer who is authorized to sanction purchases
and sales of the securities, if they are not in demat format. All securities should be
preferable lodged with the bank of safe custody.
(i) Verification of securities- where securities lay in the custody of the society the
auditor should examine each scrip carefully. The title to the securities should be carefully
examined to ensure that the security is held in the name of the society itself. It is not
sufficient merely to count the number of share, certificates or Scripts. The certificates,
warrants or the securities themselves should be examined carefully to see that, they are
complete in all resects and prima facie in order and are duly registered in the name of the
society. Where the document inspected is not a certificate or a warrant, i., e., where it is a
transfer receipt or a letter of allotment, it should be seen that the document has been
correctly described and the description of the decumbent agrees with particulars
mentioned in the ledger. Where securities are lodged with the Bank for safe custody, the
auditor should directly call for a certificate from the Bank. The certificate received from
the Bank should specifically state that the securities have been held for safe custody free
form any lien. If they are held for any specific purpose, the certificate should specify the
purpose for which they are held. Where shares and securities purchased have not been
delivered by the broker or the Bank through whom the purchases have been made, a
certificate should be obtained from the broker or the bank concerned to the effect that the
share certificates or securities have been held by them on behalf of the society and that
they have no lien over them. As on the date of balance sheet, the auditor should obtain a
schedule of investments held by the society. The list (or schedule) of investments should
give the full description of the investment, i.e., its serial number, face value, whether fully
paid the extent of uncalled liability if not fully called, etc. These particulars should be
compared which the particulars entered in the Register or Ledger of Investments.
Immediately after inspection the security or certificate, the auditor should put his initials
or tick against the particular items in the list so as to prevent its presentation once again.
The list should be initiated or the tick made only if the document inspected is a complete
of title. Otherwise, it should be ticked with a distinctive tick or mark indicative of the
document inspected, so as to remind the auditor that further evidence of title is required to
be examined.
Where securities have been kept with the bank for safe custody or as collateral
security for financial accommodation granted by the bank, this schedule of investments
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should be compared, which the certificate issued, by the bank. Each item in the schedule
should be initialed or ticked only after inspecting the document itself or correspondence
on the subject or the specific item in the certificate issued by the bank, which has custody
of the securities. Where securities are kept with Bank for safe custody, this schedule
should be checked with the safe custody certificate issued by the Bank. Each item in the
schedule should be initialed only after inspection of document itself or the relevant
correspondence relation to the security or the specific items in the certificate issued by the
Bank.
In the case of bearer warrants, it should be seen that interest coupons are in order
and re attached to the Scripps itself. The numbers of such coupons should have been noted
on the schedule.
in case of securities purchased through Demat accounts from the depositary, and
lodged in the same account, the auditor should verify the certificates issued by the
depositary at the end of financial year, and statement of purchase and sales documents
should be verified from the account abstracts provided by the depositary time to time to
the society. If the society has not obtained the account abstracts, the auditor should call it
through the society and verify the sale and purchase documents with these statements.
(ii) Valuation of securities – In the case of securities, which are quoted in the
market, quotation on the date of the balance sheet, should be obtained and the mean
between the higher and lower prices should be taken for purpose of valuation. For the
securities valuation purpose the Reserve Bank of India has issued guidelines for the
Cooperative Banks, it should be seen that the valuation is made according to these
guidelines which are described elsewhere. In respect of Urban banks and DCCB and SCB
the rates are made available from agencies like FIMMDA and quoting them in their
website. The list or schedule should show the market value of the quoted and unquoted
securities on the date of the balance sheet. Aggregate book value and market value of the
quoted and unquoted investments should be shown separately in statement. Investment
should be stated in the balance sheet at cost or market value, whichever is lower. Market
values may be compared with the cost either by comparing the cost of each investment
separately with its market value and providing for all falls in the value below cost.
However, any appreciation in the market value of the securities should not be taken credit
of. Another and more useful method adopted is to compare the aggregate cost of all the
investments with their aggregate market value and provide for the net shortfall in the
market value of the securities. Treasury bills should be shown as current assets and shown
at cost or at their face value discounted at the market rate if this is less.
(iii) Investment by Cooperative Banks: The DCCB’ and Urban Banks are required to
invest their funds in the Government securities and other securities of trusts and public
undertakings. The Reserve Bank Of India has issued various guidelines and directives
regarding these investments, how they are invested, exposure norms for each type of
investments, Brokers that are to be appointed, business limits operated by these brokers,
opening of SGL/CSGL and demat accounts, investment policy, audit of these investments,
reports of auditors, provisions regarding fluctuation of prices, trading of scripts,
classification of investments, all these points are described in the Banking part of this
manual. Auditors are required to study them and apply at the time of audit of cooperative
banks. Various circulars, which are issued by the Reserve Bank, are detailed below.
MASTER CIRCULARS
Sr. No. Circular / Directives No. Subject
1 UBD.BR Cir.19/ 16.26.00/2002-03 dated Dematerialization of PSU Bonds
29th October 2002
2 UBD.CO.BSD.I.PCB 44/12.05.05/ 2000- Guidelines for classification and
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2001 dated 23rd April 2001 and UBD. CO. valuation of Investments by
BSD.I.PCB. (Cir) 34/ 12.05.05/ 99.2000 banks
Dated 24th May 2000 and UBD. CO.
BPD.PCB. (Cir) 11/ 09.29.00/ 2003.04
Dated 2nd September 2003 and even No.
Circular 12 Dated 4th September 2003
3 BP 23/ 16.26.00/ 2002-03 Dated 2nd Valuation of securities for
November 2003. purpose of SLR
4 BPD.PCB. CIR 56/ 09.29.00/ 2003-04 Dated Investment Portfolio of Banks
2nd July 2003 transaction in securities.
5 MASTER CIRCULAR DOBD No.BP.BC .21 Prudential norms for
/21.04.141/ 2003-04 Dated 2nd September classification, valuation and
2003 operation of investment portfolio
by banks . This circular is issued
for ALL SCHEDULED
COMMERCIAL BANKS
Though the Circular referred at 7 is for the Schedules Commercial Banks the
guidelines are also useful to the Cooperative Banks, for their Investment portfolio
management.
2. Accounting Standard – Accounting for Investments (AS 13)

The Institute of Chartered Accountants of India has issued accounting standard No.
AS 13 on the Investments. Which read as follows:
1) The society should disclose current Investments, and long-term investments.
2) There should be further classification of these investments in (a) Government
or Trust Securities, (b) Shares, debentures or bonds; (c) Investment properties (d) Others
specifying nature.
3) Cost of Investment: The Cost of investment should include acquisition charges
such as brokerage, fees and duties.
4) An investment is acquired, or partly acquired, by the issue of shares or other
securities, the acquisition cost should be the fair value of the securities issued (which in
appropriate cases may be indicated by issue price as determined by statutory authorities).
The fair value may not necessarily be equal to the nominal or par value of the securities
issued. If an investment is acquired in exchange for another asset, the acquisition cost of
the investment should be determined by reference to the fair value of the asset given up.
Alternatively, the acquisition cost of the investment may be determined with reference to
the fair value of the investment acquired if it more clearly evident.
5) Societies holding investment properties should account for them as long-term
investments.
6) Investment classified as current investments should be carried in the financial
statements at the lower of cost and fair value determined either on an individual
investment basis, or by category of investment, but not on an overall basis.
7) Investments classified as long term investments should be carries in the
financial statements at cost. However, provision for diminution shall be made to recognise
a decline, other than temporary, in the value of the investments, such reduction being
determine and made for each investment individually.
8) Any reduction in the carrying amount and any reversals of such reductions
should be charged or credited to the profit and loss account.
9) On disposal of an investment, the difference between the carrying amount and
net disposal proceeds should be charged or credited to the profit and loss account.
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3.Disclosures: 1) The following information should be disclosed in the financial

statements.
a) the accounting policies for determination of carrying amount of investments;
b) classification of investments as specified in Para 1 and 2 above;
c) The amounts included in profit and loss account for, I) interest, dividends,
(showing separately dividend from subsidiary companies/societies), and rental on
investments showing separately such income form long term and current investments.
Gross income should be stated, the amount of income tax deducted at source being
included under Advance Tax paid. II) Profit and losses on disposal of current investments
and changes in the carrying amount of such investments; III) Profits and losses on disposal
of long term investments and changes in the carrying amount of such investments;
d) Significant restriction on the right of ownership , realisability of investment or
the remittance of income and proceeds of disposal;
e) The aggregate amount of quoted and unquoted investment, giving the
aggregate market value of quoted investments;
f) Other disclosures as specifically required by the relevant statue governing the
society.
4.Disclosures as per Cooperative Act: 1) The “N” form Balance sheet requires the
investments should be stated as (a) Government securities (b) Other Trust Securities, (c)
Non-Trust securities , (d) Shares of other Cooperative societies (e) Shares, debentures or
bonds of companies registered under the companies Act., and (f) Fixed deposits.
2) The Note in margin of this form requires to state the nature of investment, the
mode of valuation ( Cost or market value) should be mentioned, and if the value of any
security is less than the market value, a remark to that effect should be made against each
item in the balance sheet. Quoted and un-quoted securities should be shown separately as
per the marginal note.
3) For the depreciation of the investments there is provision in Rule 49 A (xiii) and
section 65 provides for the investment fluctuation fund for depreciation in the assets.
The note in margin requires to state the nature of investment, which denotes to the
classification of the investments, whether the investment is of current or long-term nature.
5.Stocks and works in progress – The need for valuation of stock in trade or closing stock
of goods arises because on the date of preparing the balance sheet, there would always be
in stock goods purchased or manufactured during the year or in process at the close of the
year, which will have to be sold during the following year and to arrive at the correct
figure of profits, it would be necessary to eliminate in the accounts, the cost incurred for
their purchase or manufacture and to charge the same to the profit of the year during
which these goods would be sold. In case of consumer stores, marketing and processing
societies and manufacturing societies, the verification of the physical existence and
valuation of trading stocks, stocks, stock on hand of raw materials, stores, partly
finished goods or goods under process, works in progress and finished goods are of
considerable importance, inasmuch as unless they are correctly shown, the balance
sheet will not show the true and fair view of the financial position of the society and the
profit and loss account will not give the correct results of the working of the society. It is
also possible that profits might have been deliberately manipulated in order to warrant
declaration of dividend at higher rates of payment of increased remuneration to the
Managing Director.
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6.Verification of physical existence of stocks – The process of verifying physical

existence of each item of stock at the close of the year or at the end of any specific period
is known as annual or periodical stock-taking. Complete physical counting of all the
stocks on hand should be made at the end of the year in case of all societies, which have
taken up trading or manufacturing activities. A number of progressive concern have
adopted a system known as perpetual inventory or continuous stock taking system under
which stocks are verified throughout the year, so that all the items in stock are verified at
least once during the course of the year. This system provides a better control over the
stocks, but can be adopted only where proper quantity accounts are maintained.
As regards physical verification of stock, although textbooks on auditing state
that, stock taking is not the duty of the auditor and this position has been accepted in more
than one legal decision, auditors of co-operative societies should note that they are
required to carry out their audit in accordance with the procedure laid down by the
Registrar. From a perusal of the audit memo. forms prescribed for consumers societies,
marketing societies, producers societies and similar other societies, it will be seen that the
auditor is required to physically verify stocks of the some important items. ( Vide
Registrar’s Circular No. ADM/243(Con)/ADT, dated the 24th November 1959). Stock
taking is an important duty of the auditor. The auditor should not neglect this aspect
during audit. It is true that the auditor is not qualified or is it possible for him ever if he
possessed the necessary qualification to take actual measurements, weights or count
stocks. However, he should attend at the time of stocktaking and observe the operation,
viz., taking actual measurements, weighing or counting the various items in stock. In case
of small societies, the entire stock will have to be verified, while in the case of large
societies, like sugar factories, spinning mills and other processing and industrial society,
departmental stores, wholesale and retail consumers stores, etc., since the number of items
to be checked is large, cent percent verification of the stocks may not be possible. In such
cases, the auditor should associate himself with the staff as may be necessary having
regard to the size and importance of the society should be deputed to observe actual
stocktaking in all the societies in charge of the auditor ( Registrar’s Circular No.
ADT/552, dated the 21st December 1970)
7. Method of stocktaking, Annual stock taking - In most concerns, stock is taken on last
day of the year and for this purpose, the business is closed on the last day or the last few
days immediately preceding or for following the close of the year. The store or godown
where the goods are lying is divided into number of sections and each section is placed in
charge of one or more batches of stock takers whose work in supervised by responsible
officer possessing necessary technical qualifications. Generally, each batch of stock takers
consists of two persons, one person calling out the description and quantity of the goods
and the other person entering them on the stock sheets. The process is repeated again with
the position reversed, the person who called out the description and quantity verifying
the correctness of the entries made in the stock sheets, and the other member of the team,
who had entered the figures now measuring , weighing or counting the goods and calling
out. The auditor should make careful enquiries into the entire system of stock taking,
entering and pricing. He should satisfy himself that and adequate number of persons were
engaged in stocktaking and the each step has been independently checked and further
supervised by responsible officers.
8. Observance of stock taking - During his observance of stock taking, the auditor should
attend to the following points:-
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(i) He should satisfy himself that the organization for stocktaking has been
properly planned and written instructions are issued to all the persons concerned.
(ii) He should also satisfy himself that the stock takers are doing their work
properly and that each step has been independently checked and further supervised by
responsible officers, In particular, he should satisfy himself that slow moving and absolute
substandard stocks are properly segregated and recorded in separate stock sheets. For this
purpose, it would be necessary to ascertain form the records, the periods for which the
goods are lying in stock.
9. Checking of store sheets- Final stock sheets presented to the auditor should be
compared with the rough stock sheets filled in by the stock takers at the time of
stocktaking. Quantities shown in the stock sheets are compared with the balances in the
stock accounts and the bin cards and discrepancies noted should be got clarified.
Having carefully examined the whole system of stock taking the auditors should
check the stock sheets and carry out his inquiry as under:-
(i) Check totals of stock sheet bearing in mind that there is no double entry
check upon these totals.
(ii) Check calculations, bearing in mind that items calculated as singles, may,
in fact be doubles, dozens or ever grosses.
(iii) Compare stock sheets with those of the previous years, particularly as
regards prices and quantities, making careful enquiries about the fluctuations and also
ascertaining whether any part of stock has been held for a long time and become absolute.
(iv) In case of raw materials, stores and trading stock (i.e., goods purchased
for resale compare prices with latest invoices and market prices ruling at and after the
date of the balance sheet. (AS 4) In the case of finished and semi-finished goods, their
net realizable value in the format finished products should be taken into consideration .
(v) examine the Goods Inward Books for the last few weeks of the period
and trace any large item into the stock and into the Purchase Register .
(vi) Trace any large sales towards the end of the period into the goods
Dispatched Register and see that these goods, if not delivered have not been included in
the stock .
(vii) In case finished goods, ascertain the basis upon which overheads have
been charged.
(viii) Where quantities can be checked easily this should be done by deducting
the total sales from the total purchases plus opening stocks allowing for small differences
on account of wastage .
(ix) Inquire whether any goods belonging to the society are in the hands of
the consignees, selling agents or distributors or lying in depots or warehouses. It is likely
that some of these might have been omitted.
(x) While examining stock sheets, see that no plant machinery ,tools,
furniture ands similar other capital goods are not included.
(xi) After the Trading Account is drawn up and the amount of gross profit
arrived at comparing percentage of gross profit to sales with that of previous years. If there
is any marked difference enquire in to the reasons.
Specifically observe that the sales effected during the period is very small or
considerably small, however there is gross profit or there is no sell at all, then also there
is gross profit, then the possibility of overvaluing the stock increases. This results in
showing profit, which can be distributed from the capital funds.
(xii) Periodical manufacturing or production reports, statement of expenses
incurred under different heads etc. submitted time to time to the Board of Directors,
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provide an important means of verifying the accuracy of the value of closing stock.
Although these will not form part of the regular financial audit these statement should be
checked and their accuracy and reliability ascertained.
10.Valuation of stock in trade – After the stocks taken and the quantities entered in the
stock sheets, the price at which each item in stock should be taken should be entered by a
responsible officer. Calculations, extensions and totals should be made by one clerks and
checked by another. All persons taking part in stocktaking should have initialed the stock
sheets and the whole should be certified by the Chief Engineer and the Managing
Director. Normally, stocks should be valued at lower of cost or market price which for
this purpose would mean bet realisable value or replacement cost in case of materials
and stores. The overriding consideration if choosing the basis for stock valuation is that
the basis chosen should give a true and fair view of the position and the results of that
business and this basis should be applied consistently every year- Reference should be
made where appropriate to purchase invoices and cost records. Cost may be determined by
specific identification or on the basis of average or standard cost. In case of consumers
societies including departmental stores’ and also in the case of farming societies for
valuation of crops harvested, the adjusted selling price method of determining cost would
be more appropriate. These have been discussed in more detail in subsequent paragraphs.
However, it should be noted that under no circumstances, stocks should be valued
above market price. In addition cost . i.e., purchase price, incidental charges like transport
charges, clearing and forwarding charges, municipal octroi, insurance etc. may also be
included.
Prices of some of the important items should be verified by obtaining quotations
from the market or by examining the latest invoices in the files of the society. All
calculations, extensions and additions should be checked and it should be seen that all
stock sheets are duly initialed by all the persons taking part in the stocktaking and
valuation of the stocks. It should also be seen that the final summary showing the
aggregate value of the stocks is signed by the Managing Director and other senior officers.
Stock sheets should be examined to ensure the absolute and a slow –moving stocks are
segregated and a lower value shown against them.
11.Accounting Standard: Valuation of Inventory: (AS 2) : The Institute of Chartered

Accountants of India have issued accounting standard regarding valuation of inventories.
This accounting standard does not apply to the plantations, forestry, agricultural
commodities and livestock; extractive industries such as mining, quarrying etc.; work
under progress under long term contracts, such as engineering , real estate development,
and construction projects, Shares, debentures and other securities held as stock in trade,
immovable properties and loose tools.
Definitions: a) Inventories: this includes tangible property held for sale in the ordinary
course of business, or in the process of production for such sale, or for consumption in the
production of goods or services for sale, including maintenance supplies and consumables
other than machinery spares.
b) historical cost: means the appropriate combination of cost of purchase, cost of
conversion and other costs incurred in the normal course of business in bringing the
inventories upto their present location and condition.
c) Cost of Purchase: purchase price includes cost of purchase, including duties and taxes,
freight inwards and other expenditure directly attributable to acquisition, less trade
discounts, rebates, duty drawbacks and subsidies, in the year in which they are accounted,
whether immediate or deferred , in respect of such purchase.
147
d)Cost of conversion: it includes (a) costs which are specifically attributable to units of
production i.e. direct labour, direct expenses and sub-contracted work; and (b) production
overheads, ascertained in accordance with either the direct costing or absorption costing
method.
e) Historical cost: inventories are which includes Raw materials and components, work
in progress, finished goods, and stores and spares, normally stated at the lower of
historical cost and net realisable value. The reason behind this is, the cost of previous
years is carried to next year until they are sold or consumed. However, if there is no
reasonable expectations that net realisable value would cover the cost incurred ( as a result
, for example, of deterioration, obsolescence or change in demand. It is necessary that cost,
which cannot be recovered, should be charged against the revenue of the current period.
The meaning is very simple that, the charge of any deterioration obsolescence or change in
demand should effect in which the goods are sold only.
f) Net Realisable value: is the estimated selling price in the ordinary course of business
less the estimated costs of completion and the estimated costs necessary to make the sale.
g) Accounting standard: The Institute of Chartered Accountant of India has issued the
following accounting standard regarding valuation of the inventories.
i) Normally the inventories should be valued at lower of historical cost and net realisable
value i.e. market value otherwise stated.
ii)This valuation is made on the basis of single unit or group of units.
iii) The methods of valuation are done by using the methods- FIFO, LIFO or Average Cost
methods.
iv) The historical cost of manufactured inventories may be arrive at on the basis of either
direct costing or absorption costing. Where absorption costing has been use, the allocation
of fixed cost to inventories should be based on the normal level of production.
v) Overheads other than production overheads should be included as part of the inventory
cost only to the extent that they clearly relate to putting the inventories in their present
location and condition.
vi) Inventories of consumable stores and maintenance supplies should ordinarily be valued
at cost. In appropriate circumstances, however, this may be valued at below cost.
vii) Inventories of by-products should be valued at lower of cost and net realisable value.
Where cost of the by-product cannot be separately determined. It should be valued at net
realisable value.
viii) Inventories of non-reusable waste or inventory of reusable waste for which facilities
for reprocessing do not exist should be valued at net realisable value.
h)Disclosures: The accounting policy adopted for valuation of inventories, including the
cost formulas use should be disclosed in the financial statement. Where the base stock
method is used, the difference between the value at which it is carried and the value by
applying the method at which stocks in excess of the base stock is valued should be
disclosed. There should be consistency in the method applied for valuation of method.
i)Discloser in Cooperative Act: As per the note in margin of ‘N’ form balance sheet it is
required to disclose “ the mode of valuation and stock shall be stated and the amount in
respect of raw material partly finished goods and stores required or consumption should be
stated separately. Mode of valuation of works in progress shall be stated,”
12. Auditor’s duty as regards valuation –The duties of the auditor regarding stock are (a)
to verify the existence of the stock (b) to check the ownership of the stock and (c) to see
that the stock is properly valued. Falsification of accounts, is frequently affected by means
of stock manipulations. Unless, satisfactory records of quantities, accounts are maintained,
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or the system of standard costing is in operation, the books of accounts will not disclose
what stocks should be there on the date of the balance sheet.
The types of manipulations, which are to be guarded against are as under :-
(I) Incorrect calculations, extensions and additions,
(ii) Incorrect pricing
(iii) Inclusion of goods in stock, the invoices for which have not been
included in purchases.
(iv) Inclusion of goods in stock, which have already been sold and entered as
sales prior to the date of the balance sheet.
(v) Non-inclusion of stocks in the hands of agents, in warehouses, in sale
depots, etc.
(vi) Omission to provide for diminution in value in case of damaged, and out
of fashion goods, and over valuation thereof.
(vii) Value of stocks on an incorrect basis.
(viii) Inclusion of stocks, which, in fact, do not exist.
(ix) Inclusion of such goods in stock, which are not part of stock. such as
furniture, loose tools etc.
If proper stock accounts have been maintained, any material difference shown by
the stock books and the stock sheets should be carefully investigated. The auditor should
enquire into the whole system of stocktaking, entering, pricing and checking stock
statements and find out the exact basis upon which valuation has been made. It should
be seen that the basis of valuation adopted at the beginning of the year is consistently
followed-
The basis of stock valuation is required to be stated in the accounts. The basis of
valuation may be described in one of the following ways :-
(1) At cost.
(2) At lower cost and net realisable value.
(3) At the lowest of the cost, net realisable value and replacement price.
(4) At cost less provision to reduce the net realisable value.
The expression “ market value ” does not indicate whether the net realisable value
or the replacement value is intended. It is, therefore, not appropriate to describe the basis
an “ at market rates” or “at cost ”, or as “ valued by the officers of the society ”, etc. It may
be noted that the word “cost” would be inadequate unless it is accompanied by the
explanation of the extent to which overhead expenses have been included. In case of
manufacturing societies, the appropriate description would be “cost includes materials,
factory wages, factory expenses and an appropriate proportion of production and
administrative overhead charges, but excludes fixed overheads ”.
13. Valuation of By products – In manufacturing processes, which yield byproducts, as

for example, molasses in sugar factories, cotton waste in spinning mills, oil cakes in oil
mills, broken rice and bran in rice mills, etc., It may no be possible to ascertain the cost of
the by-products. In such cases, by-products may be valued at their current ruling prices
in which case, the cost of the main product most be calculated after crediting the
anticipated sale proceeds of the by –products. The selling price basis of valuation may
also be adopted in farming societies producing crops with an annual cycle and on the
date of the balance sheet, the crops harvested may be valued on the basis of prices likely
to be realised after deducting selling cost such as transport to market centers, selling
agent’s commission (Dalali) market cess and other expenses connected with marketing.
It is considered that this would result in a more understandable presentation of the
society’s affairs as in this way, the year’s account would reflect the results of the entire
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crop cycle. In these circumstances, the basis of valuation should be indicated in the
accounts.
14. Points to be noted while valuing stocks- The auditor should satisfy him that the
system of stocktaking is appropriate and all stocks have been properly valued. If
satisfactory stock records are not maintained, the auditor should mention in his report.
While valuing stocks on hand the following points should receive specific attention :-
(i) Value of goods held on consignment should be excluded.
(ii) All goods sold, but not dispatched should be excluded.
(iv) Stocks sent on consignment should be included.
(v) Unsold goods on consignment should be valued at cost and not at selling price.
(vi) Where purchases have been made, but invoices have not been received,
necessary adjustments should be made crediting the accounts of the suppliers.
(vii) Absolute and unserviceable goods and also slow –moving goods should be
shown separately
(viii) Where goods have been received , but purchase invoices have not been received,
necessary adjustments should be made regarding the account of the suppliers.
(ix) As regards stock in the hand of third parties such as agents, consignees, etc., a
certificate showing the details of quantities and their values should be obtained from the
agents or consignees.
(x) As regards stocks in transit, it should be seen that these are duly received
subsequently and have been entered into the “Goods Received Book ”.
The auditor should compare the total value of the stocks on hand with that of the
previous year. In case values differ materially, reasons for the same should be
ascertained. Where stocks held are larger than those held in the previous year, it might be
due to large holding of slow- moving stocks, absolute or stocking for future in anticipation
of rise in prices. As already suggested, the auditor should also compare the percentage
of gross profits to turnover with that of the previous year and obtain reasons for
fluctuations, if material.
15. Verification of works in progress - In industrial concerns, at any time in addition to

raw materials and finished goods, there would also be unfinished goods or goods in the
process of manufacture. At the time of periodical stocktaking, it is necessary that the
quantity of un-finished goods and works in progress should also be verified and their
value included in the total of stocks on hand. The verification of the physical existence and
value of un-finished goods and works in progress, present a number of difficulties and
special methods are required to be adopted for their verification and correct valuation. the
method adopted for verification and correct valuation. The method adopted for verification
would depend upon the type of the goods produced and the manufacturing process and no
uniform method can be recommended for their verification. The stage upto, which the
goods are manufactured or works are in progress, should give an indication of their
valuation. In case of manufactured goods, the additional cost required for completion of
the manufacturing process can be ascertained and the value of the un-finished goods or
goods under process can be calculated by deducting these accounts from the cost of
production. Where the principle of standard cost or may other method is adopted for
calculating the cost of production, it should be seen that the totals of the stock sheets agree
with the balances in the standard cost accounts. Where the item of works in progress
appear in the balance sheet, it should be ensured that the amounts shown represent only
cost of material and labour. Only a reasonable proportion of the factory on cost may be
allowed to be debited. The administrative on cost should not be allowed to be added.
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16. Stock valuation certificate to be obtained from management- A certificate in the form
given below should invariably be obtained from the management of the society, with such
modification considering the nature of business of society.
..................................................................society, Ltd. ……………………….
Date...................................
To,
The Auditor ,
Dear Sir,
We hereby certify that, the inventory as at the close of March 31, 20 , summarized
as follows :-
Value Rs. Mode of valuation
(a) Stock in Trade , i.e., goods purchases for
resale.
(b) Raw materials ..
(c) Work –in - progress including semi- finished
goods, goods in process, etc
(d) Finished goods
(e) Stores and spare parts
(f) Loose tools
(g) Others
Total
-----------------------
The stock taking, was taken under the supervision of responsible persons and
certify that :-
(i.) The inventory is the property of the society and that there is no mortgage, assignment
or other lien upon any of the goods listed. ( If there is any charge, the same may be stated).
(i) No goods received on consignment have been included.
(ii) The quantities listed were on hand and were determined by actual count,
weight or measurement.
(iii) Excesses /shortages between the physical inventories and book balances
amount to Rs. have been adjusted in the books of accounts.
(iv) the liability for all goods included in the inventory has been taken up in the
book, and
(v) absolute or unusable goods have been reduced to their net realisable value.
(vi) We further certify that, the stock is at its fair and true value as per our
accepted accounting policies, and there is no change in accosting policy, during this
financial year. ( If there is change shall be indicated with the effect on profit and loss
account)
Yours faithfully,
(Sd)
The above certificate should be signed by the Chief Engineer, Works Manager,
Factory Manager or other Technical Officer–in-charge of the Manufacturing operations
and also by the Managing Director, Secretary or other Principal Executive Officer of the
society.
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17. Sundry debtors – A very important item appearing on the assets side of the balance
sheet of almost all types of societies is “ loans outstanding ” or “ Sundry Debtors ”. In case
of co-operative banks and credit societies, the item of “ loans and advances ” or “ loans
due members ” is perhaps the most important item on the assets side. In case of
consumers societies, marketing societies and other societies conducting trading activities
there would be sundry debtors for credit sales. Advance payments might have been made
or deposits kept with suppliers against purchases or orders for supply of materials or
services to be rendered. There would also be advances made do directors and employees to
meet expenses for buying materials or against. The amounts shown under “ Sundry
Debtors ” should include all amounts due in respect of goods sold on credit, services
rendered or in respect of other contractual obligations, but should not include any
amounts which are in the nature of loans or advances which should be shown under the
separate heading of “ loans and advances ” or “ loans due from members”. The auditor
should obtain confirmations for the balances with the debtors. Sundry debtors includes
following items, auditor should take care while auditing these items as described in
following paragraphs.
RBI DIRECTIVES BDD: The reserve bank of India and Nabard have issued
various guidelines in regards bad and doubtful amounts to be calculated, for the purpose
of providing them, are explained elsewhere.
18.Outstanding advances – This item is ordinarily included in “ Sundry Debtors ” but

many times, it is shown under a separate heading and in mostly composed of advance
made to directors and employees, which are yet to be accounted for. Advances should
have been made only for specific purpose and the director or employee to whom the
advance is given should be asked to render accounts as soon as the purpose for which
the advance has been given, has been served. Thus, if advances are made for making
purchases or for meeting traveling expenses and other expenses, the advances should be
cleared immediately the purchases are made or the officer or employee returns to
headquarter. Advances have been made or deposits kept with suppliers against order, the
advance paid should have been adjusted in the invoice or deducted from the total amount
of the bill. If these procedures are followed, then, as at the end of the year, only temporary
advances granted recently for specific purposes, should be outstanding and the amounts
adjusted early during the following period. However, in many of the societies, some of the
directors, employees and officers, taking advantage of their position, obtain large
amounts as advances under some pretext or other, keep the amounts with themselves for
long periods and subsequently refund the advances in cash either in one lump sum or in
installments as it suits them. The auditor should make a note of all such cases and
obtain explanation of the management and also of the director or officer concerned
and if the explanation given or the clarification furnished is not considered satisfactory,
should not hesitate to include such payments in his schedule of irregular payments. If
the amounts involved are large and no satisfactory explanation is forthcoming, a case of
temporary misappropriation should also be made out. In all cases, the purposes for
which the advances have been made, should be ascertained and if it appears that the sole
purpose of granting the advances was merely to accommodate the director or officer,
proceedings under section 88 of the Maharashtra Co-operative Societies Act should be
instituted.
(a) Checking of outstanding advances- all items outstanding at the close of the year
should be carefully examined and it should be seen that the advances have not been
outstanding for long periods and have been granted for specific purposes. As regards
advances made to contractors against construction work and supplies of materials, these
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have been dealt with already. These advances are generally shown under the heading “
Building account ”or “ Construction account ”.
A statement showing particulars of the various items appearing under the heading “
Sundry Debtors” , “ Advances outstanding ”,etc., should be obtained and agreed with the
figure appearing in the balance sheet. Trade debtors i.e. Sundry Debtors for credit sales
should be distinguished from other debtors such as debtors for advances, deposits against
orders or advance against purchases advances to directors and officers. Schedules of
different types of advances of outstanding at the close of the year should be obtained and
checked with the personal ledgers and other records and the total agreed with the amount
shown against the items in the balance sheet. In case of trade debtors, it should be seen
that the control accounts are maintained up-to-date and reconciled with the totals of the
personal ledger balance at regular intervals. Where there are a large number of ledgers,
there should be suitable sectional control accounts in the general ledger. Statements of
accounts should be sent regularly to all debtors and other customers who have regular
dealing with the society. Differences reported by them and the manner in which they have
been dealt with should be ascertained. Items under dispute should receive particular
attention.
While checking ledger balance on the schedule, notes should be made showing the
period during which the debt or other debit balance has been outstanding, Whether it has
been subsequently recovered and if not, why it has been allowed to remain outstanding
and whether any action has been taken for its recovery. Any other information, which will
enable the auditor to judge whether the debt appears to be good and recoverable, should
also be collected. A list of all accounts, which are overdue, should be prepared and
checked by the auditor.
(C) Deposits with suppliers – As regards deposits with suppliers or for services, it should
be seen that, these are of a normal character, such as deposit for telephone connection,
security deposit with Municipality, Electricity Board or other local authorities or corporate
bodies and recognized wholesalers and distributors. Receipts issued by them should be
seen and periodical confirmations should also be obtained as evidence of the deposit till
continuing with them. It should be seen that such deposits when they are made are carried
as assets in the balance sheet and not written of as “ telephone charges”, “ Municipal taxes
” or “Electricity charges ”, etc. Where deposits of a special character or of a substantial
amount are made, such a advance payment of taxes, advance payment of deposit for water
connection, electric installation, income tax and other taxes, etc. these should be verified
according to the circumstances of particular case and their adjustment watched.
(D) For obtaining confirmations from the sundry debtors the auditor should call the
details of outstanding balance from the society and communicate it to the concern
debtors, asking him to confirm the balance shown in the letter and if he disagree with
the balance shown ,in letter sent account abstract for reconciling the balance at the
society level. The format of letter is as-
(Letter calling confirmations from sundry debtors./ creditor, suppliers, advances etc. )
From : Name of the auditor and address, date
To, the concern debtor, address
sir,
We are auditing the accounts of the --------------------------------------- society, ltd. -----------
---- Taluka- --------- District, for the period from dated----------- to dated------------ as a
statutory auditor. The society has shown following balances with you, in its account
books, you are request to please confirm the balances shown below, are agreed with your
books of account on the date 31/3/ . If your books does not agree with these balances,
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please sent us account abstract as per your books, so that the balance can be reconciled
with the books of society.
Sr. name of the account narration of balance Dr. Amount Remarks if
No. amount or Cr. shown by any
the society
You are also requested, to sent this confirmation or account abstract as the case
may within a period of 10 days, from the receipt of this letter, so that we can take
necessary notes, in our audit report, if we have not received with this period we will
presume that, the balances are agree with the books maintained by you in your account
books.
sincerely your
signature and name of the auditor signing
19.Loans outstanding – Loans outstanding in co-operative societies except those doing

banking business, are generally fixed loans repayable in one lump sum or in installments
specified in the loan bond or agreement . Loans advanced to members would be different
according to the nature of the business operations conducted by the society and the nature
of security, which the borrower can offer. the method of checking loans outstanding is
described in the following paragraphs :-
Lists of loans and advances outstanding on the date of the balance sheet should be
obtained and checked with the loan ledgers and the total of the list of balance should be
agreed with the balance appearing in the control account in the General Ledger . While
checking loan balances , the following points should be seen.
(i) Amount outstanding - The outstanding balance in any account should not
exceed the maximum limits for individual loans, if any, prescribed for different types of
loans in the by-laws. Where special loans or loans in excess of the prescribed limits have
been sanctioned to any individual or institution, authority for the same should be seen.
For the cooperative banks the Reserve Bank of India and NABARD (national Bank) has
prescribed certain limits to be advanced to the individual, group of individuals, and
industries, it should be seen that these exposure norms are followed by them.
The period for which the balance has been outstanding – If the loan has become
overdue, whether extensions have been granted properly. If the period of payment has not
been extended, how long the loan has been overdue and what steps have been taken for its
recovery. Whether notices have been promptly issued and legal proceedings instituted.
The make up of the balance – It will have to be seen whether the balance consists of only
advances made or also includes interest capitalized and amounts debited to the party on
account of charges and expenses incurred such as godown rent, insurance charges etc.
Legal expenses incurred for recovery, such as notice fees, court-fees, lawyer’s fees,
arbitration fees and expenses etc., will have also to be debited and included in the balances
except the cooperative banks as they have to show these expenses separately under the
heading “sundries” as per guidelines of the Reserve Bank.
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Security for the loan – The nature of the security and whether it is adequate and easily
realisable. If the loan has been sanctioned against personal security; whether the sureties
are alive and good for the amount; if secured by other security, whether the value of the
security adequately covers the outstanding balance and also interest accrued and accruing;
whether it can be easily realised should occasion arise; it should also be seen that a
condition is incorporated in the agreement where-under the borrower undertakes to make
up the margin in case the security becomes inadequate owing to price fluctuations.
Whether there are any other circumstances, which indicate the debts
becoming irrecoverable, such as death or resignation or removal from service of the
borrower or his sureties, insolvency of the borrower, attachment of his property or salary
under an order or decree of a civil court.
Where the loan is repayable in installments, whether all the previous
installments have been promptly paid as and when they become due.
Loans to committee members – Sub-section (2) of section 75, lays down that at every
annual general meeting of the society, the committee shall lay before the society a
statement showing the details of the loans (if any) given any of the members of the
committee or any member of the family of any committee member, including a society or
firm or company of which such member or members of his family is a member, partner, or
director (as defined in the explanation 1 to clause 2 of section 75 of the Act, family in this
explanation includes wife, husband, father, mother, brother, sister, son, daughter, son-in-
law, daughter-in-law) during the last preceding year. Thus, along with the balance sheet
and the profit and loss account, a list of loans given to members of the committee and their
family members with there involvement as directing or member concern, has to be laid
before the annual general meeting. This would ensure that the members of the committee
taking advantage of their position do not appropriate large funds of the society by
sanctioning to themselves disproportionate loans.
20.(a) Confirmation of Debit balance (SA 505 – External confirmation) – The

outstanding balance in Sundry Debtors Account should be checked with whatever
evidence is available, viz. statement of accounts, record of payments, confirmation letters
issued, balance confirmation letters received, etc. Confirmation of balance by direct
communication with debtors will have to be carried out where the number of debtors is
small and the outstanding amounts are large, however, it may not be possible where the
number of debtors is very large. In such cases, direct communication with selected debtors
with balances exceeding a specified amount will have to be made. Such confirmation of
ledger balances may be positive under which method, the debtors is communicated the
exact balance in his account and asked to confirm the same or point out discrepancies, if
any. The confirmation may also take the negative form when the debtors in further
informed that if no reply is received from him within the period specified in the letter, the
balance would be taken as being correct. Where the number of accounts is very large and
the balance involved is small, the negative method of securing confirmation of ledger
balances may be adopted . However, where the outstanding balances or where the auditor
suspects the correctness of the accounts, it would be advisable for the auditor to send the
debtor a statement of his account with the society and request him to communicate the
discrepancies, if any. Where passbooks are issued to members, and other constituents, who
have dealings with the society, these should be called for and returned to the constituents
duly filled in with a request to check their accounts and confirm the outstanding balances.
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(b) Issue of statement of accounts – In central co-operative banks and urban

banks, urban credit societies, rural credit societies, and salary earners societies the
borrowers, are issued passbooks or periodical statements of accounts are issued to them,
monthly , fortnightly, weekly and in some cases, even daily. At the end of each accounting
period, the closing balances in their accounts are communicated to them and they are
requested to verify their accounts and confirm the correctness of the balances. The
negative form of getting balance confirmation is generally adopted and the borrowers are
informed that if they do not reply or make further enquiries before a specified date or
within a specified period from the receipt of the communication, it would be presumed
that they have accepted the correctness of the balance as communicated to them.
In all cases, however, irrespective of whether confirmations have been obtained or not, the
system of follow–up of receivables, collection of debts and action taken against defaulters
should be carefully examined.
(c) Verification of Members Pass Books – In agricultural credit societies and
other rural societies and also the smaller urban credit societies, outstanding balance should
be verified with the members’ pass–books. This is necessary since members of these
societies are illiterate or and trusting people and have full faith in the honesty and integrity
of the secretary and other office bearers. They do not always try to check whether their
transactions with the society have been correctly recorded or not. During the course of
audit of these societies, the auditor should try to contact as many members as possible and
check their passbooks. Also, by putting intelligent questions, he should try to satisfy
himself that their transactions with the society have been correctly recorded. A list of
members whose accounts have been verified, should be prepared and their signatures
should be obtained against their names for having accepted the correctness of the balances
shown against them. A Members’ Verification Register should be maintained in the from
prescribed by the Registrar. This Register should be seen by the auditor during the course
of his audit and a note made of members whose accounts have not been verified during the
course of the last three years. Instruction contained in Registrar’s Circular No.ADT/243,
dated 9-5-1972 should be noted. for this purpose the auditor should obtain the
confirmation from the members as well as depositor in the following form
Sr. name of the Amount outstanding as on 31/3/ signature
No. lonee/ depositor of
member/
depositor
type of deposits type of loans
Before me
auditors signature and date

(d) Issue of account slips in salary earners societies – In salary earners societies,
in addition to pass books, slips containing particulars of amounts to be recovered from the
members on account of dues of the society under various heads, are also issued so as to
enable members to know beforehand what amounts would be deducted from their salaries
on account of the dues of their society. These account slips or extracts from deduction
sheets are generally distributed through the departments or sections in which the members
are working . A certificate from the head of the department or section to the effect that the
account slips have been duly distributed should be obtained and filed along with copies of
the monthly recovery sheets.
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(e) Confirmation of accounts in Banks – In central banks and urban banks,

confirmation letters should be sent to all borrowers who have been sanctioned fixed loans,
cash credits or overdrafts. The auditor, during the course of his audit, checks exhaustively
confirmation slips received back from the borrowers. The system followed for issue of
confirmation letters and securing confirmation of balance by the bank should be
ascertained and it should be seen that confirmation letters have been sent to all borrower in
respect of borrowers who have failed to return the confirmation slips issued to them,
enquiries should be made to ascertain whether their non-compliance is due to any dispute
with the society about the correctness of the balance or about any of the items debited to
their accounts.
(f) The auditor may call the confirmation from the banks for there balances shown
in societies account books by sending letter, however the banks some time not responds to
the letter of auditor, in such cases, the auditor shall request to the society, to call such
confirmations and account abstracts. The format of letter shall be as-
(Letter calling confirmations from the banks. )
From : Name of the auditor and address, date
To, the concern bank, address
sir,
We are auditing the accounts of the --------------------------------------- society, ltd. -----------
---- Taluka- --------- District, for the period from dated----------- to dated------------ as a
statutory auditor. The society has shown following balances with you, in its account
books, you are requested to please confirm the balances shown below, are agreed with
your books of account on the date 31/3/ . If your books does not agree with these
balances, please sent us account abstract as per your books, so that the balance can be
reconciled with the books of society.
Sr. name of the account narration of balance Dr. Amount Remarks if
No. amount or Cr. shown by any
the society
You are also requested, to sent this confirmation or account abstract as the case
may within a period of 10 days, from the receipt of this letter, so that we can take
necessary notes, in our audit report, if we have not received with this period we will
presume that, the balances are agree with the books maintained by you in your account
books.
sincerely your
signature and name of the auditor signing
21.Examination loans outstanding – (a) Assessment and treatment of doubtful and bad
debts – It is necessary that the balance sheet and the profit and loss account of the society
checked and certified by the auditor should disclose fairly and accurately, the financial
position of the society during the period covered by the audit. It is, therefore, an important
duty of the auditor to examine the balance sheet very carefully and see that all the assets,
which are shown in the books , appear at their proper value that they exist in fact and that
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no asset has been disposed of or charged in any way without the transaction being
recorded in the books of the societies. Sub-clause (iv) of clause (6) of Rule 69 of the
Maharashtra Co-operative Societies Rules, provided that the audit memo shall contain a
schedule with full particulars of any money or property belonging to the society which
appears to the auditor to be bad or doubtful debt.
In agricultural credit societies, central banks, urban banks, salary earners societies
and other institutions whose main activity is dispensing credit loans outstanding forms a
major portion of the assets. As already stated, examination of debts is one of the most
important duties of the auditor. Outstanding loans and advances in banks and credit
societies consist of current dues and overdues. An overdue account is an account in
which the principal outstanding or any portion thereof or any installment, which has
become due has been defaulted. Overdues are further required to be classified by the
auditor in good, doubtful and bad. Examination of overdue debts is a special responsibility
of the auditor under sub-section (2) (i) of section 81, which defines the duties of the
auditor.
A bad debt it a debt which is considered to be irrecoverable. Such a debt will have to
be written off against the Bad Debts Fund or any other reserve or even share capital since
it has been ascertained and reckoned as bad debt after all possible methods of recovery
have been tried and proved futile. A doubtful debt is one, the recovery of which in whole
or in part, is uncertain. All such debts should be carefully examined and financial
prudence requires that adequate provisions should be made against such debts.
(b)classification of debts into bad and doubtful.- to classify a debt as bad or doubtful, the
two main considerations are security for the debt and the period for which the debt has
been defaulted. If the security for the loan is reduced to nil and the loan has been
outstanding for a fairly long period, there is every chance of the debt turning out bad,
However, if the security has been impaired, debt outstanding has been overdue for a
period, which is not considered too long, the debt may be termed “doubtful” and classified
as such. It, therefore, becomes necessary to examine the security behind the loan and the
period for which the loan has been overdue in order to determine whether a particular
debt should be classed as doubtful or as bad.
(b) security for loans.- The security for loans in agricultural credit societies falls
under one or more of the following categories:-
(i) Personal security of the borrower and sureties. Generally two sureties are
taken.
(ii) Charge against crops, vide section 47 of the Maharashtra Co-operative Societies Act.
However, this charge is difficult to enforce since once the crops are harvested and come
out of the field, it is difficult to establish that they were raised out of the loan made by the
society.
(iii)Charges against lands by way of declarations made under section 48 of the
Maharashtra Co-operative Societies Act. This is the most common form of security for
crop loans and if the value of the lands declared is sufficient, no other security is insisted
upon. Sureties are taken only when the value of the lands declared is considered
insufficient or the lands held are not owned by the borrowing member but are held by him
at tenant.
In urban banks and societies, the security takes the form of tangible, immoveable
or moveable property held by the borrowing member although in a very large number of
cases of small loans, the security obtained is personal security of the borrower and one or
more sureties, generally two. Immoveable property is got mortgaged to the society while
loans against goods may be either against pledge of the goods or mere hypothecation in
which case possession of the goods remains with the borrower. In salary earners
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societies, the security behind the loan is the undertaking given by the employer to deduct
and pay over to the society dues of the salary of the member against authority given by
him. It is however, cleared that the section 49 (2) specifically states that the undertaking
from the employer is not necessary when, the agreement is executed by the member and
society, providing to deduct his loan borrowed from the society from his salary. The
employee is bound to deduct when he receive a copy of agreement and demand from the
society for requesting deduction from the society of his member, who is employee.
The nature and extent of the security available will have to be carefully examined
before classifying a debt as doubtful or bad.
The period for which the loan has been defaulted, is another important factor for
determining whether the debt should be classified as doubtful or bad. For this purpose,
the correct age of an overdue loan will have to be ascertained by ignoring book
adjustments and unauthorized extensions.
CHARGE FOR COMPANIES- If in case society finance loans to the companies

registered under Companies Act, the provision under section 125 of that Act, specifies
that, the financing society shall register the charge of the loans advanced to the company
and the assets mortgaged for the same, within stipulated time limit. Generally companies
are financed by the cooperative banks, the auditor shall see that, in such cases the society
has registered the charge with the Company Registrar with time. The auditor should study
the provisions of Companies Act in this regards.
22..Procedure for classification of debts- Examination of overdue debts is a special

responsibility of the auditor under sub-section (2) ( i ) of section 81, which defines the
duties of the auditor. A list of overdues with full particulars regarding age, security, action
taken for recovery etc., should be obtained by the auditor before he proceeds to examine
and classify them into good, doubtful and bad. This list should be carefully examined by
the auditor with special reference to security available and of the overdue . Any delay in
referring to arbitration under Section 91 of the Act, cases of defaulters and in sending
awards obtained, for execution should be enquired into. After a careful scrutiny of all
overdue accounts in the above manner, the auditor should proceed to classify the
overdues into good, doubtful and bad, in accordance with the instruction contained in the
Registrar’s circular referred to above. The information should be obtained in the following
proforma for the purpose of certification of bad debts, for agriculture credit societies .
Column No. Particulars of the column Details
1 Loan account number
2 Name of the member
3 Amount of loan advanced
4 Amount outstanding
5 Of which overdue
6 Period for which it is overdue
7 Nature of security
8 Amount considered Doubtful
9 Amount considered as bad
10 Reason for doing so.
To facilitate the assessment of doubtful and bad debts by the auditors, it is
necessary that all the account books and registers should be written up-to-date. In
agricultural credit societies, it is necessary that the assets or “ Haisiyat Register ( or
Jindagi Register) ” should be maintained up-to-date and verified by the Bank Inspector or
other responsible officer of the Bank or the Department at regular intervals. In urban banks
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and societies, it is necessary that the Members’ credit worthiness and surety liability.
Register should be maintained up-to-date. All societies are required to maintain “
Arbitration Register ” .
Nabard ( National bank) has issued master circular and various circulars in respect
of primary agricultural societies for assessing , classification and Provisioning of the bad
and doubtful debts (IRC or prudential norms) , which are explained elsewhere. The auditor
should obtain soft copies of these circulars from website of NABARD. (www.nabard.org)
In central banks, periodical financial statements and stock statements obtained from the
borrowing societies should have been filed properly and the Advances Register and
Ledgers should be posted up-to-date. Agricultural credit societies are required to furnish
fortnightly recovery statements during the recovery season and it the duty of the officers
of the bank to scrutinize them and take prompt action to pull up the societies, which show
slackness in effective recoveries.
Worksheet for estimating the bad and doubtful debts at Central Banks for the
purpose of writing off.
Column Particulars of the column Details
No.
1 Sr. No.
2 Name of the society
3 Date of financial particulars
4 Total loans outstanding against the members
5 Total loans of which overdue for more than 1 years (
against column 4)
6 Book value of assets
7 Erosion the value of assets ( bad debts / assets 100%)
8 Erosion the value of assets ( doubtful debts / assets 10%)
9 Total ( column 7+8)
10 Realisable value of the Assets (column 6 - 9)
11 Outstanding liabilities a) Borrowing outstanding from the
bank
12 b) of which overdue for more than one year
13 c) Interest payable to the bank
14 d) of which overdue
15 e) Borrowing from the Government
16 f) Other borrowing if any
17 g) Other outside liabilities
18 Total ( column 11+13+15+16+17)
19 Amount considered as Bad
{Notes: (1) Particulars in this statement may filled in the from the audit reports of the
societies.
(2) The financial particulars may relate to the last day of the cooperative year for which
the latest audit report is available.
(3) the banks dues from the society may be considered irrecoverable if the same are not
covered by good loans outstanding from members of the society or the realisable value of
assets of the society is not sufficient to meet its outside liabilities. The extent of erosion of
the dues to the central bank will be determined after taking into account the dues to the
government, and specific charge created on any of the stock or other assets by way of
hypothecation , mortgage or otherwise and appropriating the balance of the realisable
assets on prorata basis among all the creditors having a like claim.}
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Nabard ( National bank) has issued master circular and various circular in respect
of District Central Cooperative Banks for assessing , classification and Provisioning of the
bad and doubtful debts (IRC or prudential norms) , which are explained elsewhere.
23.(a) Procedure for writing off of bad debts – Under provisions of Rule 49 of the
Maharashtra Co-operative Societies Rules, no loss or other outstanding dues found to
be irrecoverable can be written off unless it has been certified as irrecoverable by the
auditor. The Rule lays down that all loans including interest thereon and recovery charges
in respect thereof, which are found to be irrecoverable and certified as bad debts by the
auditor appointed under Section 81 of the Act, shall first be written off against the Bad
Debt Fund and the balance, if any may be written off against the Reserve Fund and the
share capital of the society . The rule further lays down that all other dues and
accumulated losses or any other loss sustained by the society, which cannot be recovered
and have been certified as irrecoverable by the auditor, may be written off against the
reserve fund or share capital of the society.
(b) Auditor’s responsibility for certifying bad debts- It will thus be seen that before any
loss incurred by the society can be written off, it has to be certified as bad or irrevocable
by the auditor. The auditor thus assumes a great responsibility as all amounts certified by
him as bad will be written off and no indication of the existence of the debt or other
outstanding would be available once the debt is written off. The auditor has, therefore, to
be very careful before he certifies a debt or loss as bad and irrecoverable .
The Cooperative Tribunal has held that for instituting proceedings under Section
88 of the Maharashtra Cooperative Societies Act, it is, not necessary that the debt
outstanding should be written off. It is sufficient to show that due steps were taken to
recover the dues, but they could not be recovered. It is, therefore, desirable to classify a
debt as doubtful and continue to show it in the accounts rather than writing it off, unless
the auditor has satisfied himself that all remedies for recovery of the debt or loss have
been taken including proceedings under section 88 for reimbursement of losses were
taken. in case of irrecoverable loans, it has to be seen that cases of the defaulters were
referred to arbitration or negligence on the part of the committee, proceedings should have
been instituted against persons found to be negligent. Byelaws of co-operative societies
specifically lay down that it is the duty of the committee to consider the overdues and take
prompt steps to recover dues and overdues.
As regards losses which are to be written off it should be seen that these are
genuine trade losses incurred during the normal course of the business of the society
and that they are not the result of any activity taken up be the committee which is not
permitted under the byelaws.
(c) Additional conditions to be fulfilled for writing off bad debts.-Under provision below
Rule 49, the following additional conditions are required to be fulfilled, before any had
debts or losses can be written off:-
(1) Prior approval of the general body should have been obtained.
(2) Prior approval in writing of the Registrar and the Central Bank to which the society
is indebted should have been obtained. If the society is not affiliated to the central bank
or is affiliated but is not indebted to the central bank, prior approval of the Registrar
should be obtained.
(3) In case of central banks, prior approval of the state co-operative bank and the
registrar has to be obtained.
While giving approval, the registrar may impose such conditions as to writing of
and the recoupment of the Bad Debt Fund ” and restoration for partly or whole of the
amount written off against the Reserve Fund from out of future profits as he may deem fit.
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Societies classified as “ A ” or “ B ” at the time of their last audit, however,

enjoys a special privilege. The Rule permits them to write off bad debts and losses from
out of the Bad Debt Fund specially created for the purpose without seeking permission of
the Registrar or the central bank. However, the other requirements, viz., sanction of the
general body and certification of the auditor must be complied with. Thus in all cases, the
auditor is the authority to decide whether the debt or loss is irrecoverable.
(c) Provision to be made for doubtful and bad debts- Under section 65(1) and rule 49
(A) of the Act, before arriving at the figure of net profit, adequate provision is require to
be made for all amounts required to be written of as bad debts and losses which cannot be
adjusted against any fund created out of profits. Thus, a fair estimate of the likely bad
debts has to be made every year and necessary provision made for writing them off.
However, no bad debt can be written off against current profits and before writing off
any debt as bad, the procedure laid down in Rule 49 has to be followed. Where bad debts
or losses cannot be ascertained exactly, necessary contribution based on estimates should
be made in the Bad Debt Fund, which should be charged to the profits. If there are excess
profits after payment of dividend at a fair rate and making other appropriations, the
remaining profits may be carried to the Bad Debts Fund.
(d) Certificate for writing of bad debts: The auditor is required to give certificate for
writing of the bad debts. The certificate should be the following format.
“ This to certify that, I have examined the enclosed list of overdues and losses provided by
the society for the purpose of writing of them. And I certify that,
1) I have examined the enclosed list provided by the society and satisfied that the necessary
steps for recovery has been taken by the society, and that are to the satisfaction of me to
prove that the loans / losses are irrecoverable.
2) The losses are for business are business losses of the society, and are not due to negligent
of the management of the society.
3) That the society has obtained necessary prior approval from the General body of the
society, vide resolution No. dated
4) That the society has made necessary provision of Bad and Doubtful fund to write off these
losses.
5) The society is in “ A /B/ C/ D “ audit class in the last audit.
6) The amount certified as Bad is Rs………..( Inwards Rs…………………………..) against
the Bad debts fund Rs………………….
Date Sd/-
Place: Auditor
24.Prepaid expenses- These should be verified from the bills received and payments made
subsequently. Where the expenses, such at rent, rates, taxes etc. are payable on time basis
proportion of the payment which relate to the period subsequent to the date of the
accounts, should be calculated and shown under the heading “ prepaid expenses ”. The
usual payments of such type are for insurance prima paid in advance, municipal taxes,
motor vehicle taxes, membership fees, subscriptions etc.
25.Deferred Revenue Expenditure – As we have seen, there are certain items of

expenditure, which are primarily of a revenue nature, but the benefit of the same in not
exhausted during the period covered by the profit and loss account and not required to be
capitalised. Such expenditure termed “deferred revenue expenditure ”may be carried
forward and written off within the period during which the benefit arising from it is likely
to be felt, so as to avoid an unduly heavy charge being made against the profits in year.
Examples of such expenditure are alteration to plant, heavy repairs to buildings, plant and
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machinery, painting of buildings, abnormally heavy expenditure over advertisement etc.

Preliminary expenses incurred by the society prior to commencement of its activities have
been dealt in the following paragraph. Even after the society has commenced its activities,
there will be expenses of the nature explained above which will have to be treated as
deferred expenses and written off, during the cause of the following years. Thus, where a
new wing is added to the factory building, the cost of the expansion of the building should
be capitalized, but where only repairs and alteration have been carried out, the expenditure
should be treated as deferred revenue expenditure. Other expenses, which are generally
allowed to be treated revenue have been given above. Where deferred revenue expenditure
appears to have been shown in the balance sheet, it should be seen that amount carried
forward is reasonable. Reasons for not charging the entire amount to the profit and loss
account of the year should be ascertained and only such proportion of the expenditure
incurred, which reasonably pertains to a subsequent period, or where the benefits accrued
from the expenditure would be felt during the coming years, should be allowed to be
shown as deferred revenue expenditure.
26.Investment amortization: The urban banks and District Central banks are permitted to
trade in Government securities transactions, the securities purchased by these banks are
many time to be purchased at the market rate, which as much above of the face value of
the security. The excess value paid for the securities , if not sold the excess amount of face
value is treated as deferred revenue as it is not realisable. The banks should required to
debit this amount to the investment amortization account, and should be written off in the
remaining life of the security till maturity.
27.Fictitious assets – Besides the above assets, there are also certain assets, which
sometimes appear in the balance sheet. These may be fictitious assets, which in fact, are
capital expenditure which may not have been resulted in identifiable profit earning assets
and which still remains to be written off. The usual example of fictitious assets are
preliminary expenditure or formation expenditure development expenses, expenditure
incurred other than experiment and research etc. Where debenture are issued, commission
and discount on issue of debentures will also be fictitious assets. The auditor should
check the balance carried forward from year to year and ascertain the reasons for their
continuance.
28.Accounting Standard AS 8 : Research and development: a)Generally the research and

development activity is not undertaken by the Cooperatives except such as Iffco,
Kribhaco, etc., however, some sugar factories or spinning mill spends very less amount
on research and development. Separate accounts are not maintained for the same. The
cost of research and development includes, a) salaries, wages, other related costs of
personnel engaged in research and development, costs of material and services consumed
for it, depreciation of building, equipment and facilities which are used for this purpose,
amortization of the cost of building, equipment and facilities used for this purpose,
overhead costs related to R and D payments to outside bodies for R and D, and other
related costs.
b) Criteria of R and D to deferred the expenses: The above cost of Research and
development should be deferred if, the product or process is clearly defined and it is
attributable to the product or process, the technical feasibility has been demonstrated, it is
accepted to use the product by the management, the selling and administrative, and
research and development cost will be covered from the future revenues. It should be
deferred on scientific basis.
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29.Preliminary expenses- The amount debited to preliminary expenditure account should

be carefully scrutinized. Generally, every society has to incur some expenditure prior to its
registration. The following expenses can be shown under the heading “ preliminary
expenditure ”.
(1) Printing of byelaws, (2) Printing of accounts forms and registers, (3) Stationary,
(4) Postage, (5) Reasonable expenditure of promoters over convinces and miscellanies
expenditure.
Along with the application for registration of a society, the promoters are required
to submit a statement of preliminary expenses incurred by them. At the time of first audit,
the auditor should check the statement and see that the expenditure incurred is reasonable.
In the first general meeting of the society held after its registration, the promoters are
required to present a statement of expenditure incurred by them up to a date not more than
14 days prior to the date of holding the first general meeting. In this statement, all money
received from the promoters and other applicants for membership of the society are to be
shown. The entire amount collected from the promoters by way of share capital and
entrance fees (also contributions towards formation expenses recovered from prospective
members, if any) are required to be credited into the Bank. The bank account is generally
opened in the name of these promoters, one of who is styled as the “chief promoter ”. No
withdrawals are permitted from this account except with permission of the registering
authority. In some of the societies, promoters collect contributions towards formation
expense from prospective members. Promoters are required to furnish a statement of
expenditure incurred by them along with the application for registration of the society.
Promoters are also required to prepare statement of receipts and payments, which is
required to be adopted by the members at their first general meeting. From the receipts and
payments statement, the auditor is required to prepare a statement showing the amounts
collected from members and also liabilities incurred by the promoters in the name of the
society. This statement will be the basis for preparation of final accounts. As explained
above, all expenditure incurred up to date of commencement of production activities, may
be permitted to be capitalised in the case of societies which have undertaken
manufacturing activities.
As regards other types of societies, certain expenditure incurred for organisation
activities may have to be allowed to capitalise. Thus, for example, in case of consumers
societies, all expenditure incurred for interior decoration and also over publicity and
advertisement may be allowed to be capitalized.
Where considerable amounts have been borrowed and the interest is required to the
paid, the interest paid on borrowed funds up to the date of commencement of the activities
may also have to be allowed to capitalise.
Although in the above types of activities, preliminary expenses and other
miscellaneous expenses incurred prior to commencement of activities, or even prior to
registration of the society may be allowed to be capitalized, by correspondingly increasing
the value of assets, it is not prudent to capitalise any expenditure which does not add to the
value of the asset. Thus, expenditure incurred over outside painting and interior
decoration, advertisement, publicity, etc., should be treated as deferred revenue
expenditure and written of during the course of the next three to four years.
30.Debit balance of Profit and loss Account – If the results of the working of the society
reveal the losses, the losses incurred, i.e. the debit balance in the profit and loss account,
will have to be carried forward, unless it can be written off against accumulated profits or
reserve fund or share capital, with the prior approval of the general body. Registrar and
central financing agency, if indebted and affiliated, as per rule 49 of the Maharashtra Co-
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operative Societies Rules, 1961. All future profits will have to be utilised first for utilising
previous accumulated losses.
The debit balances of profit and loss account carried over from year to year will
have to be shown on the assets side of the balance sheet until they are written off.
31.Verification of cash on hand and in Bank – (a) Counting of cash on hand: Cash on
hand should be counted on the date of the balance sheet in case of all important
societies. Since the audit is to be carried out up-to-date or till the end of the previous year,
cash on hand should be counted during the course of audit. However, the cashbook from
the date upto, which the accounts are audited, till the date of counting of the cash, should
be examined carefully to ensure that the cash on hand is correctly arrived at. While
physically verifying cash on hand, the entire cash balance including petty cash, cash in
sales depots, cash in branches and other offices should be brought in one place and
verified simultaneously. Regarding urban banks and DCC banks having more than one
branches in one city, cash should be counted simultaneously. The institute of Chartered
Accountants of India has suggested that cash should be verified by surprise check and
particularly opening cash should be check. This is necessary to prevent substitution cash
balances.
The officer counting the cash on hand should obtain a summary of the cash
counted by him (viz., denomination and number of currency notes and coins) and also
offer remarks in cashbook about counting of cash such as
“ I have counted / verified the cash balance as per cashbook on / / amounting
to Rs……….. (Inwards Rs………………………..), produced by
shri……………Cashier/Secretary/ Treasurer (or the designation of the officer handling
cash as he has been authorized by the board), the same is verified by me and found correct
as per cashbook, the same is in the custody of shri.............., after verification, the
denomination of the cash is detailed below.”
Denomination in Rs. No.s Amount Rs.
1000
500
100
50
20
10
5
2
1
coins
cash is in my custody after verification verified by me
Cashier/Secretary/ Treasurer Statutory auditor

Place: Date: / / Time of counting:
The verifying officer should write denomination of the cash, date of verification,
where the cash is of opening of the day or closing of business, place of counting and sign
the cashbook.
The statement of cash counting obtained by the verifying officer should be signed
by him and also the Manager or Managing Directors of the society and also by the auditor
counting the cash. The cashbook should also be signed by the auditor mentioning the
amount counted and the name of the officer of the society who presented the same and the
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date on which the cash was counted. (Registrar’s Circular No. ADM.243. Dated 16
September 1957 and 8th August 1959).
(b) Cash in Bank – Every society has a bank account. All co-operative societies are
required to open their banking accounts with District Central Bank of the district. Societies
in Greater Mumbai are required to have their accounts with the Maharashtra State Co-
operative Bank or Mumbai District Central Bank. All cash in excess of the limit prescribed
Rule 107-C or in the byelaws, has to be remitted into the Bank. Societies in the mofussil
may also open an account with the Maharashtra State Co-operative Bank in addition to the
District Central Co-operative Bank. However the society is required it cash balance with
DCCB or MSC having at least “A” class for last three consecutive years. Cash in Bank
should be verified from the passbook, Bank statements and Bank balance certificates. If
the balance does not agree it will be necessary to prepare a reconciliation statements. The
bank reconciliation statements should be prepared at regular intervals by the cashier or
other officers receiving the bank statements. These reconciliation statements should be
checked and it should be seen that the bank balance agrees as per the Bank statement. It is
also necessary to obtain balance certificates from the bank in order to ensure correctness
of the bank balance. The auditor should himself write to the bank to furnish to him the
balance certificate of all the accounts of the society with the Bank the format of letter
calling balance certificate is given in elsewhere.
Items in the reconciliation statements on the date of the balance sheet should be
traced during the following period. If they are any outstanding items, enquiries should be
made.
(c) Opening of account and deposit of fund with other banks - Under clause (a) of
Section 70, a co-operative society is required the deposit its funds with the District Central
Co-operative Bank or the State Co-operative Bank having at least “A” class for last three
consecutive years.. Under clause (d) (Newly inserted) of the Section, for deposit of funds
in any co-operative bank or banking company, permitted by rules, or by general or special
order in that behalf by the State Government, for this purpose. Rule 54 provides in this
regards that, In case eligible bank not available as provide in clause (a) of section 70 for
investment of funds in area of operation of the society, the society may invest its funds in
a mode permitted by the rules, or by general or special order in that behalf by the state
Government or in mode permitted by the authority authorised by the State Government in
this behalf. Hence, prior permission of the authority has to be obtained for opening an
account with an urban bank or a commercial bank if they are not in approved list. While
granting permission to open an account with of the co-operative bank or a commercial
banks, the authority may also impose such conditions as he may deem proper, such as
maximum amount, period for which deposit can be made etc. Auditors should see that
prior permission of the authority to open an account and deposit funds with any bank other
than the District Central Co-operative Bank and the State Co-operative Bank has been
obtained and that the conditions laid down by the authority while granting the permission
are duly observed. Under clause (e) of the section 70 the societies are permitted to invest
their funds in any other mode permitted by the rules, or by general or special order of the
State Government. The RBI/ registrar has restricted urban banks and urban credit
societies; non-agricultural credit societies to deposit their funds in another urban bank.
The Reserve Bank has also prohibited urban cooperative banks for investing their funds in
the another cooperative urban banks vide its Circular No. UBD.BR. 43/ 16.20.00/ 2000-
01 date 19th April,2001. They are allowed to invest only with strong scheduled Urban
Cooperative Banks who complied with the following norms;
a) The bank is complying with the prescribed level of CRAR
b) Net NPA’s of the bank is less than 7%
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c) The bank has not defaulted in the maintenance of CRR/SLR requirements for the
last two years.
d) The bank has declared net profits for the last three consecutive years.
e) The bank has ‘A’ rating from Cooperative Auditors for the last three consecutive
years
f) The bank is complying with the prudential norms.
g) The strong scheduled banks are also prescribed certain limit to accept the deposits
from non-scheduled banks that are I) the deposits accepted should be within the limit of
10% of its total deposits ii) the rate of interest should be market related. iii) total deposit
on any one non-scheduled bank should be to the limit of 20% of its capital funds.
Scheduled Urban cooperative banks should not place their deposits with other
scheduled cooperative bank or non-scheduled cooperative bank.
Where the society have more than one account, the above procedure for checking
the bank account should be followed and balance certificates should be obtained in respect
of all bank account.
(d) Importance of verification of cash on hand- In order to prevent misappropriations of
cash balance, it is not only necessary to insist the cashbook is always written up-to-date,
but also it is also necessary that satisfactory arrangements exist for independent
verification of the cash balance. At the close of business, a responsible officer should
verify actual cash on hand and compare it with the balance shown in the cashbook. The
Chairman in the case of primary agricultural societies and the Manager or the Managing
Director in the case of the bigger societies should verify the cash on hand at the close of
the day and sign the cashbook. The closing cash balance should be mentioned on figures
as well as in words along with the name and designation of the person having custody
thereof. In case of the larger societies, the cashbook should be signed by the cashier or
Treasurer who has custody of the cash balance as well as the Managing Director,
Manager, Secretary or other officer who has been specially authorized for the purpose.
In may also be mentioned that unless adequate and satisfactory arrangements have
been made for the surprise checking of the cash on hand at frequent but irregular intervals,
the cashier is apt to be tempted to misappropriate a portion of the cash balance, which he
knows will not be normally required for the day-to-day business of the society. The
knowledge that somebody in authority might at any time demand production of the entire
cash balance, generally keeps away the potential offender from committing
misappropriation.
(e) Precautions to be taken while counting cash- a number of precautions are required to
be taken by verifying officers and auditors while verifying cash balance. If different cash
balance are maintained, such as imprest cash with local branches and depots, cash of
different sections of departments, etc., all the cash balance need to be called for
simultaneously and verified, as there is always the danger of substitution.
In case of primary agricultural societies, which have group secretaries, there is also
the likelihood of the cash balance of one society being utilised for making good the deficit
of another society in-charge of the same Secretary. Similarly, when the same person
happens to be the Chairman or Treasurer of a number of institutions and has with him the
cash belonging to more than one institution, unless the cash balance of all the societies are
simultaneously demanded for verification, there is always the likelihood of the deficit of
the cash balance of one society being made good by drawing from the cash balance of
another society.
In a number of societies, particularly, those which have been conducting fair price
shops it is usual to find a large portion of the cash balance held in the form of coins which
is difficult to count. When a large amount is held in the form of loose coins of different
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denominations, a portion of it can always be misappropriated, since inspecting/ verifying

officers and even office bearers of societies do not always have sufficient time and
patience to carry out complete verification. However, if coins of different denominations
are sorted out and kept in separate bags duly sealed and the bags are not to be opened
except in the presence of responsible officers, this form of misappropriation can be
prevented.
(c) Measures to be taken for preventing temporary misappropriation of cash –
Temporary misappropriation can also be committed by deliberately delaying payment into
bank, on the plea that remittance could not be sent before the close of the banking hours.
One or two days taking can easily by misappropriated. Cash balance may also be
misappropriated temporarily by taking wrong totals and / or by wrong extraction and
carrying forward of cash balance. Where audit is not carried out up-to-date, the
transactions for the intervening period (i.e. from date up to which audit has been carried
out and the date on which cash has been actually counted) will have to be checked quite
often in order to reduce the cash balance advances, shown to have been made to directors
or staff. The reasons for payment of advances should be noted. It should be seen that
advances made are genuine and for proper reasons.
It has also to be remembered that even though adequate and satisfactory
arrangements are made for frequent verification of the cash on hand, the cashier and
secretaries of some of the co-operative banks and societies are shrewd and influential
persons. They can always find obliging friends who are willing to give I. O. Us. or even
undated cheques which come handy whenever cash balance is to be produced for
verification To be effective, therefore cash verification should be a surprise to the cashier
and the verification should catch him unaware.
As already stated the easiest method for concealing shortage of cash and the one
which is being commonly adopted is for the cashier to find excuses for not writing the
cashbook up-to-date. Unless the cashbook is written up-to-date and the exact cash balance
ascertained, counting of cash will have no meaning. It is therefore, necessary for verifying
officers to see that the cashbook is always written up-to-date.
(d) Auditor’s responsibility for verifying cash and hand – It may be mentioned that
most of the frauds relating to the cash on hand have come to light only when the auditor
visits the society and calls for the production of cash balance for his verification. Section
81 of the Maharashtra Co-operative Society Act specifically lays down that audit under
the section includes the verification of the cash and securities of the society. In addition
to the auditor, other inspection officers including co-operative officers and Assistant
Registrars besides the Bank Inspectors can demand production of the cash on hand for
verification. However, the general impression appears to be that it is only the duty of the
auditor to count the cash during the course of his audit. The Registrar has issued very clear
instructions in this respect in this respect in his circular. No. RSR-61 dated 30-10-1954. If
all the inspecting officers make it a point to demand production of cash balance, at the
time of their visits to the societies, there would be considerable fewer cases of
misappropriation. The auditor should also obtain certificate in the following form
regarding cash on hand on the date of the balance sheet.
“Certified that the cash balance mentioned on the balance sheet at 31st March 20.
Represents cash on hand in the Head Office and all the branches, pay offices, depots and
other offices of the society/bank situated at different centers in the area of operation of the
society /bank and custody certificates in respect of all these cash balances have been
obtained from the Manager /Accountant /Cashier /Agent, etc., of the branch, depot or other
offices concerned ”.
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This certificate should be signed by the Chairman and the Managing Director or
other principal executive officers of the society. The auditor should pass remarks
regarding cash verification by him or by other authorities, in his audit report.
32.Arrangement and grouping of Assets in form “ N ”and disclosures – As regards

display of the various items of assets in the balance sheet instruction contained in the
marginal note in from “ N ” have been summaries below for the items wherever related.
Corresponding figures at the end of the previous year are also required to be given.
Discloser required to be given as per this form are italicized in forgoing paragraphs.
1.Cash and Bank balance
Fixed deposits and call deposits with central bank and other approved banks
should be shown under the heading “ Investment ” and not under the heading “Cash
and bank balances”.
2.Investment- Investment should be shown under the separate heads: -
The nature of each investment and the mode of valuation (cost or market value)
should be mentioned. If the book value of any security is less than market value, a
remark to that effect should be made, against each item.
Quoted and un-quoted securities should be shown separately.
III. - (1) Investment of staff provident Fund, (2) Advances against staff provident Fund.
3.- Loans and advance. -In case of Central Banks and other Federal societies, loans due
by societies and individual members should be shown separately.
Loans and advances should be shown under heads mentioned in “N” form: -
Out of loans and advances outstanding following disclosure is required to be made
Of which overdues, Rs................................
(Amount overdue is required to be shown in the column for particulars by way of
specific note).
The following amounts are also specifically shown in the column for particulars: -
Loans due by managing committee members Rs.............................
Loans due by Secretary and other employees Rs...............................
Note. - Sub-section (2) of section 75 provides as under: -
At every annual general meeting of a society, the committee shall lay before the society
a statement showing the details of the loans (if any) given to any of the members of the
committee or any member of family (as defined in the Explanation 1 to sub-section (2)
of section 75) of any committee member (including a society or firm or company of
which such member or members of his family is a member, partner or director, as the
case may be) and the details of repayment of loan made , during the last preceding year
and the amount outstanding at the end of the year. The family as per this clause
includes, wife, husband, father, mother, brother, sister, son, daughter, son-in-law and
daughter in law.
It should be seen that this requirement is complied with.
4.Current assets are to be shown under different heads: -
Mode of valuation of stock should be stated.
Amount in respect of raw materials, partly finished goods and stores required for
consumption are required to be stated separately. Mode of valuation of work in progress
has to be stated.
5.- Fixed Assets – Fixed assets should be shown under different heads: -
Under each head, the original cost and the additions thereto and deductions there from
made during the year and the total depreciation written off or provided upto the end of
the year should be stated.
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VII –3 VERIFICATION AND VALUATION OF LIABILITIES
1. Classification of liabilities – Owned capital and borrowed capital – The liabilities

of co-operative societies will be different according to the types of societies and the nature
of activities undertaken by them. However, they are generally shown under the following
heads in their balance sheets.
(1) Share capital (2) Statutory reserve (3) Other funds (4) Deposits from members
and non-members (5) Borrowings secured and unsecured (6) Trade creditors, (7)
Outstanding creditors and provisions.
All liabilities except capital and the statutory reserve fund and other funds
built out of profit which constitute the owned funds of the society, are to be grouped
under two heads –long term and current liabilities. Long-term liabilities are those, which
are not payable within a year. Current liabilities are those payable within a year.
Deduction of total current liabilities from the total of current assets would show the
adequacy or otherwise of the resources available to the meeting its day-to-day needs. The
excess of current assets over current liabilities is an extremely important figure, which
would reveal the financial stability of the society and its disability to meet its day-to-day
commitments arising during the course of its business.
(a) Share capital – State participation in the share capital of co-operative society – The
authorised share capital of the society should be ascertained from the byelaws. It should be
seen that, this is not exceeded. The authorised share capital can be increased by an
amendment to byelaws. The auditor should advise the society to increase the authorised
share capital whenever he finds that as a result of issue of new shares to new members and
applicants for membership. The state has been participating in the share capital of a
number of important cooperative institutions. Accordingly issue of a special class of
shares redeemable preference share has been provided for in the byelaws of most of
societies. Government contributes towards these preferential shares, which are issued to
Government only. However, these share carry no special right to any fixed dividend and
dividend at the rate declared by the society and payable to ordinary shareholder only is
paid to Government on the shares held by it. Conditions regarding payment of dividend,
redemption of the shares, creation of the Share Capital Redemption Fund, etc., are
contained in the Government orders sanctioning the share capital contribution and it will
be the duty of the society to see that these conditions, which have been accepted by the
society.
Where there is no provision of preferential shares in the byelaws of the society,
byelaws does not provide for authorised or paid up capital for state Government or any
local body, the auditor should suggest to the society to modify its byelaws suitably and
also bring this facts to the notice of the registering authority. Redeemable preference
shares issued to Government are always fully paid of, although ordinary shares of the
society might have been partly paid up.
Under section 55 of the act, in the event of the society of which shares are
purchased by Government, is wound up, the liability of Government in respect of the share
contributed by it is limited to the amount paid in respect of such shares. Shares issued to
Government are “fully paid ”and hence the question of any further liability does not arise.
(b) Principal State Partnership Fund and subsidiary State Partnership Fund –These
funds are required to be created and maintained by the Apex society (State Level
Institutions) and the central society (Central Cooperative Banks and other central
societies), respectively. Contributions to the Principal State Partnership Fund, received by
the Apex society are to the utilised only for purchasing directly share other society or for
contribution to the Subsidiary State Partnership Funds established by the Central societies
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from out of which the central society has to purchase shares of primary societies affiliated
to it. Section 50 provides maximum limit of 25% for holding the share capital in
cooperative credit structure societies(includes primary agricultural societies, district
central banks and state cooperative bank) to be held by the State Government. Under sub
section (1) of Section 58, all moneys received by an apex society in respect of share
purchased from out of the Principal State Partnership Fund on redemption of the shares or
by way of dividend are otherwise are required to be credited to that fund. Under sub
section (2) of the section, all moneys received by the Central State Partnership Fund on
redemption of such shares are by way of dividend or otherwise are in the first instance, to
be credited to that fund and then transferred to the Apex Society for being credited by
them to their Principal State Partnership Fund. Sub section (3) further provides that all
moneys and dividends credited to the Principal State Partnership Funds specified above
should be paid to the State Government irrespective of whether the shares stand in the
name of the Apex Society or Central society. The State Government is not entitled to get
any return on the above, as per clause (4) of section 58.
(c) Societies which receive Government share capital contribution – At present
Government share capital contribution is provided to the following types of societies,
under the various schemes approved by the Central and State Governments: -
(1) Credit societies and service co-operatives (seva societies, formerly large sized
and small sized multi-purpose societies).
(2) District Central Co-operative Banks.
(3) Maharashtra State Co-operative Bank, Maharashtra State Agricultural and Rural
Development Bank, Maharashtra State Co-operative Housing Finance Society.
(4) Maharashtra State Co-operative Marketing Federation, District Marketing
societies and primary marketing societies.
(5) Processing societies including sugar factories and spinning mills.
(6) Fishery societies, poultry societies, piggery societies. Dairy Societies.
(7) Co-operative Wholesale and retail stores and certain other primary consumers
societies.
(8) Industrial societies including labour contract societies and forest labourers
societies.
(9) Weavers societies.
(10) Housing societies for backward classes.
(11) Farming societies.
Share capital contribution in case of primary agricultural credit societies and
District Central Banks in indirect whereas share capital contribution in case of all other
societies is direct. As such, only the State Co-operative Bank and the District Central Co-
operative Banks are required to maintain the principal and subsidiary State Partnership
Funds, respectively.
A) Own Capital: Every Societies byelaw provides share capital contributed by the
members of the society. The auditor should verify the schedule provided by the society,
with the personal ledger balance and General ledger. The auditor should confirm that the
balances are agreed with the balance shown in the General Ledger. The maximum limits
for holding shares by any individual is prescribed in Section 28 of the Act, auditors should
observe that is adhered to.
2.Valuation of Shares: The valuation of shares is required while refunding the share
capital to the member after ceasing of his membership as per rule 23 of the Maharashtra
Cooperative Societies Rules 1961 only if the society having limited liability for shares.
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For the unlimited liability of shares the societies are required to refund the actual amount
received by them.
In case of limited liability, the society shall refund the amount as it is arrived at by
a valuation based on the financial position of the society as shown in the last audited
balance sheet preceding the cessation of membership. The rule also provides further that,
the amount so refund should not exceed the face value of share, though the valuation is
more than the face value as per byelaws. In case of value less than the face value, then the
amount refunded should be the less value, as it comes from the valuation.
The value required to be refunded, should be as per last audited balance sheet, thus, it
means that the auditor should give the valuation in his audit report every year. The rule 23
provides the manner of valuation as dividing net worth of the society by number of shares
the valuation of share should be arrived. Thus the auditor has to first calculate the net
worth. net worth is also defined in the explanation under the rule as- “Net worth means
paid-up share capital plus free reserves( Reserve fund, unutilized building fund,
dividend equalization fund, carried forward balance net profit, any other fund which is
not marked specifically for any liability) minus accumulated loss.”
The accounting concepts standard provide for valuation of shares, as the net
realisable value of the assets divided by the number of shares of paid up capital. For
arriving the net realisable value should be determined as under, by the auditor for the
cooperative societies.
Sr. No. Particulars Amount
A Own Funds
1 Paid up share capital
2 Statutory Reserve
3 Building Fund
4 Other Free Capital Reserves (created from
appropriation of Net Profits)
5 Profit of the current year
6 Total (column 1 to 5)
7 Minus Accumulated losses (if any)
8 Net realizable value of Assets
9 No of paid up shares
10 Value per share (column 8 divided by column
9)
11 Face value of per share
12 Excess / decrease of value per share
Notes: a) The revenue reserves created by charging profit and loss account should not be
considered for valuation of share as they represents erosion in the value of the assets, such
as depreciation fund, Bad and doubtful fund, investment fluctuation fund etc. however,
excess provision may be considered by the auditor, for valuation. But the same should be
disclosed in the audit report.
b) Funds like employees provident fund, gratuity fund should not be considered for the
purpose of valuation.
c) Funds created for the specific purpose as per Byelaws out of appropriation of profit may
be considered for valuation if they are not utilised for the same purpose.
d) The another method for valuation of shares would be on the basis of realisable value of
the assets is described below. This also gives the net worth of the society.
Sr. No. Particulars Amount
1 Total assets
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a) Liquid Assets
b) Current Assets
c) Fixed Assets (minus depreciation on them or if
depreciation fund is created it should be subtracted from
the assets)
2 Total of Assets
3 All receivables
4 All payables
5 Net of receivable and payables + or – (3-4)
6 Net realisable assets (2-5) or net worth
7 No. of shares (excluding Government share capital)
8 Book value of the shares (6 divided by 7)
Explanatory Notes: 1) The liquid assets should include the cash and bank balance,
investment, which are realisable immediately, call deposits, and money at short call notice
etc.
4) Current Assets: includes stocks, stock of printing stationary, vehicles, safe and
furniture, dead stock, furniture and fittings, fixtures, etc.
5) Fixed Assets: includes land and building, machinery and plants, lease hold lands, etc.
6) Other receivable: includes all other items excluding mentioned in 1,2,3, above,
including the loans and advances, sundry debtors, but does not include fictitious assets like
preliminary expenses, or losses carried forward, accumulated losses etc. as they are to be
deducted from the own funds.
7) Other payables includes: Government share capital, share anamat, deposits,
borrowings, other payable, sundry creditors, and other items of liability side excluding the
profit, or accumulated profits.
8) It should be noted that the share capital, statutory reserves, capital reserves, as stated in
above paragraphs, should not considered for this purpose, however the net of own funds
should be tallied with the amount of net realisable assets, as per the first method of
valuation.
4.Reserves and Provisions- Statutory reserve fund- Under section 66 of the Maharashtra
Co-operative societies Act, all co-operative societies are required to carry one fourth of
their net profits to the statutory reserve fund. The Registrar has however, been empowered
under the section to permit societies to contribute a lesser amount to the Reserve Fund, but
not less than one tenth of the net profits. Thus, creation and maintenance of the reserve
fund out of the annual profits is compulsory under the provisions of the Act and no
distribution of profits can be made until necessary amount as required under Section 66 of
the Act is carried to the statutory Reserve Fund. The Reserve Fund is indivisible and it can
be used only for purposes permitted under the Act, viz., for writing off losses and bad
debts or for some public purpose likely to promote the object of the Act or for some
purposes of the State or local interest. In addition to amounts credited out of profits,
byelaws of societies generally lays down that entrance fees, donation not earmarked for
specific purposes and other unusual or extra-ordinary receipts should also be credited to
reserve fund. Capital profits on sales of immovable properties and other fixed assets and
similar other non-recurring receipts, which are not to be distributed by way of dividend,
are also required to be credited to reserve fund or some other fund. Under Section 66 of
the Act, the reserve fund of the society may be used in its business or invested outside the
business of the society subject to the Provisions of Section 70 of the Act. However, under
Rule 54 of the Maharashtra Co-operative Societies Rules, reserve fund is required to be
invested separately The Registrar has directed that the reserve fund of primary societies
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should be deposited with district central co-operative banks. The district central co-
operative banks and urban banks are required to deposit their reserve fund with the
Maharashtra State Co-operative Bank. Limited Mumbai.
5.A) Investment of reserve and other funds: The district central cooperative banks or
state cooperative bank can invest their 50 % of the reserve fund in their business, subject
to the prior approval of the Registrar. If the reserve fund is equal to or more than its paid-
up share capital such society may invest that portion of the reserve fund which is in excess
of its paid-up share capital, or a portion thereof , in its business decided by general body
meeting with prior approval of the Registrar. In addition to the modes specified in clause
(a) to (d) of section 70 the societies can invest their funds in debentures issued by the
Cooperative Agricultural and Rural Multipurpose Development bank or State or central
Government loans. The housing societies are permitted to invest their fund for expenditure
on the maintenance, repair and renewal of building of the society if they are formed on co-
partnership basis. The processing societies and industrial societies, such as, sugar
factories, spinning mills etc. are permitted to invest in acquiring, purchase or construction
of lands, buildings, and machinery, decided by general body meeting with prior approval
of the Registrar. Government has also permitted by notifications mention below, to
contribute upto 10 % of their reserve fund for the purposes of National Defence fund, or
other fund approved by Central Government, National defence certificates, or defence
deposit certificate or koyana relief fund.
GN C and R DD NO. CSL / 1562/ 54874-J DATE 20.11.62
GN C and R DD NO. CSL / 1562/ 25415-J DATE 18.4.64
GN C and R DD NO. CSL / 1567/ C-3 DATE 20.12.67
5.(b) Funds created out of profits – The term “fund” should strictly speaking denote
investment of a reserve outside the business of the society. Thus, the term should be
applied only when the particular reserve is represented by specific investments outside the
business of the society. The Institute of Chartered Accountants of India has recommended
that all reserves, which are not represented by specific securities should be called reserves
or reserve account and the term “ Reserve Fund ” should be used only when the amount of
the fund is invested outside the business of the company. However, so far as co-operative
societies are concerned, there is no such distinction made either in the Act or the Rules and
the term “ fund ” is indiscriminately used to denote all reserves created out of profits
irrespective of whether the amounts thereof are represented by specific investments
outside the business of the society. The Statutory Reserve Fund, however, has to be
distinguished from other funds inasmuch as in the act itself, it is styled as “fund”, although
in certain cases, it may not be represented by actual investments.
(a) Meaning of “ Reserve ” – The term “ reserve ” has not been defined either
in the Co-operative Societies Act or the Companies Act. The term, however, has been
negatively defined in the Companies act as “ not including any amount written off or
retained by way of providing for any known liability ”. The term “provision” means any
amount “written of or retained by way of providing for depreciation, renewals or
diminution in value of assets as retained by way of providing for any know liability of
which the amount cannot be determined with substantial accuracy ”. The Companies
Act further lays down that where a provision in the opinion of the directors of the
company in excess of that which is reasonably necessary for the purpose, the excess
must be treated as a reserve and not as provision. This provision has been made with a
view to prevent in creation of secret reserves during years when large profits have been
made. However, no such provision has been made in co-operative law and societies are
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free to create any number of reserves either by charging the amounts to profits or by way
of appropriation of profits and since practically no distinction has been made between
reserves and provisions and there are also no statutory restrictions on the amounts to the
provided of undermined liabilities and anticipated losses, the creation of secret reserves is
facilitated. It is therefore, the duty of the auditor to see that all amounts held back or
retained from profits are correctly shown in the balance sheet under their proper heads. He
has to ascertain that the provisions made for undermined liabilities and anticipated
losses are reasonable and where they are in excess of what he considers reasonably
necessary, they should be shown under the heading “ Reserves ”and not as “provisions”.
A certificate expressing the opinion of the Board of directors that, the amounts provided
for or considered by them as reasonably necessary should also be obtained.
5(c) Provision for losses and unascertained liabilities – It has, however, to be noted that
the existence of reserves including the statutory reserve fund entirely depends upon the
valuation placed on the different assets and if these are excessive either owing to
inadequate provision for depreciation or inclusion of fictitious assts or any other reason,
the reserve may be merely nominal or may be considerable smaller than what it has been
made out to be in the balance sheet.
5.(d)Provision – A provision in required to be made when a loss is anticipated, but the

amount thereof cannot be ascertained exactly. As the loss will have been incurred before
the date of the balance sheet, the profit and loss account for the year will have to be
debited with the estimated amount of the loss, so at to show the correct position and a
provision account created and shown on the liability side. Such provisions will have to be
made for losses likely toe be sustained on the realisation of certain assets and also for
accruing liabilities the amounts of which cannot be precisely ascertained, which will not
result in the acquisition of corresponding assets. Examples of losses in the realisation of
assets are bad debts, rebets, discounts or other allowances etc. It is the duty of the auditor
to see that either such losses are written off, or adequate provision is made to meet them.
5.(e) Provision for unascertained liabilities – As regards unascertained liabilities, it is

likely that bills discounted may be dishonored, guarantees may have to be fulfilled, or
damages under pending action, claims for which have not been admitted may have to be
paid. Losses might also result from fire or other risk not fully covered. Such provisions are
to be shown either under their proper headings or under the general heading of “ suspense
accounts ”. The auditor has to see that adequate provision has been made for all such
accruing liabilities. However, no provision is required to be made for liabilities accruing
which would result in the acquisition of assets of corresponding value, as, for example,
orders for purchase of capital goods, forward sales or purchases, unfinished contracts, etc.,
except where special commitments have been made and losses are anticipated.
6.Assessment and treatment of Doubtful and Bad Debts –Auditor’s responsibility as

regards adequacy of provisions- In preparing and examining the balance sheet of the
society, it is the duty of the auditor to satisfy himself that all the assets shown in the
balance sheet appear at their proper value, that they exist in fact and that no asset has
been disposed of or charged in any way without the transaction being recorded in the
books of the society. Sub-clause (iv) of clause (6) of rule 69 of the Maharashtra Co-
operative Societies Rules provides that the audit memo shall contain schedules with full
particulars of any money or other property of the society, which appears to the auditor to
be bad or doubtful debt. Examination of overdue debts has been made a special
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responsibility of auditor in view of their far-reaching consequences on the financial

position of the society. All overdues in agricultural credit societies and non agricultural
credit and non credit societies are required to be classified into good, doubtful or bad in
accordance with the instructions of the Registrar contained in various Circulars, are to be
calculated and provided for. The auditor should carefully study these circulars and the
principles enunciated therein should be applied for the classification of the outstanding
debts of other types of societies. For the district central banks and urban banks Reserve
bank and Nabard has issued prudential norms for classification, recognitions and
provisioning under their Master circulars No. UBD/BSD/IP.30/ 12.05.05/2001-02 dated
26.12.2002 and NO. NB. DOS. No. POL/ P-57.2002-03 Circular No. 193/ DOS.21/2002
dated 17.8.2002 respectively, Which are subsequently modified on every year in July,
should be required to be studied and applied for the classification of bad debts.
Having ascertained in the manner laid down in the Registrar’s circulars. The extent
of doubtful and bad debts in the society and the amount of the provision he considers
necessary, the auditor should proceed to check the provision for Bad Debts Account or the
Bad Debts Fund Account in the general ledger and see that the required entries have been
made therein. In should be seen that necessary entries have been made therein. It should be
seen that necessary entries have been passed either through the cashbook or the journal.
7.Writing off of bad debts – Section 65(1) and Rule 49 A of the Act requires that all bad
debts should be written off before arriving or the amount to the amounts of net profits.
However, instead of writing off bad debts against current profits, it is more appropriate to
write off the bad debts against the provision for Bad Debts or the Bad Debts Fund already
existing or brought forward from previous year and fresh provision made after reviewing
the bad debts position then existing. The difference on the account will then represent the
extent of the new provision that is required to be made by debiting to the profit and loss
account for the year. It has to be noted that writing off bad debts by directly debit in the
amount of the bad debts to the current profits, amounts to bypassing the provisions laid
down in Rule 49 of the Maharashtra Co-operative Societies Rules and should be
objected to by the auditors.
Where the provision for bad debts is considered inadequate by the auditor, he should
discuss the matter with the management and suggest the committee to increase the
provision, and he should qualify his report and also deal with it in his audit memo. He
has to certify the adequacy of provision for urban cooperative banks and District Central
Banks, State cooperative bank and have to report the same to the Reserve Bank and
Nabard respectively.
8.Depreciation in the value of Investments- Investments Fluctuation Fund. - Where a

large number of investments are held and the market value of the investments on the date
of the balance sheet is less than their book value, it is necessary to provide for the loss that
has occurred. This generally is done by creating an Investment Fluctuation Reserve or
Provision for Depreciation of Investments by debiting the required amount to the annual
profit and loss account each year and crediting the Investment Fluctuation Fund or
Provision for Depreciation of Investments. Contribution to the Investment Fluctuation
Fund is compulsory under provisions of Rules 51 and sub rule (xiii) of the rule 49 A of the
Maharashtra Co-operative Societies Rules. For the urban cooperative banks Reserve Bank
of India has issued circular No. BPD.PCB.Cir. 12/09.29.00/2003.04 dated 4th September
2003 for creation of investment fluctuation Reserve and investment depreciation Reserve
respectively, These circulars are modified and converted into master circular by the
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RBI/Nabard, for the investments held for trading and sales and for investments held till
maturity. Auditors are required to study them for provision purposes in the urban banks.
9.Sinking Fund- A sinking fund is created either to redeem an existing liability at the end
of a certain period or to provide for the diminution the value of existing assets, which will
have to be replaced at the end of the stated period. Societies, which are permitted to raise
funds by issue of debentures, are required to create a sinking fund for the redemption of
the debentures at the end of the period for which they are issued. Housing societies,
Industrial Estates, State Agricultural and Rural Development bank and similar other
societies, which acquire immoveable property like buildings, factory sheds, etc., are
required to create sinking fund which is required to be invested outside the business of the
society. As already stated the creation of the sinking fund entails a charge on the profit and
loss account every year of an amount which, if invested at compound interest, will
produce the required amount necessary to redeem the liability as acquire the new asset at
the end of the given period. Thus, societies, which have issued debentures, will be enabled
to pay off the debenture replacing their buildings. Will have sufficient money to construct
a new building. In case of debentures, the investments of the sinking fund are held in the
names of the trustees in accordance with the terms of the trust deed. In case of housing
societies, however, since there are no creditors, and the investments belong to the society
itself, sinking fund certificates are required to be issued to the members who have
contributed towards the sinking fund at regular intervals according to the provisions of
there Byelaws. The sinking fund is created by debiting to profit and loss account according
to the provisions of sub rule 2(1) of Rule 49 A of the Maharashtra cooperative societies
Rules 1961.
10.Bonus Equalization Fund - Rule 52 of the Maharashtra Co-operative societies Rules

provides for the creation of the Bonus Equalization Fund. Sub-rule (1) permit societies to
create out of their profits a Bonus Equalization Fund for payment of bonus to members
and non-members, other than paid employees. As regards payment of bonus to paid
employees, necessary provision has to be made before calculating the net profit and is
therefore, a charge on profits, whereas provision for payment of bonus as contemplated in
Rule 52 forms an appropriation of the profits and has to be approved by the annual
general meeting. Under clause (4) of section 2 of the Act, “bonus” means payment made
in cash or kind out of the profits of the society, to a member or to a person who is not a
member, on the basis of his contribution (including any contribution in the form of labour
or service) to the business of the society, and in the case of a farming society, on the basis
of both such contribution and also the value or income or, as the case may be, the area of
the lands of the members brought together for joint cultivation as may be decided by the
society , but does not include any sum paid or payable as bonus to any employee of the
society, under the Payment of Bonus Act, 1965. Sub-rule (2) lays down that the Bonus
Equalization Fund shall be utilized only for payment of bonus.
11.Dividend Equalization Fund – Sub-rule (2) provides for the creation of the Dividend
Equalization Fund out of the net profits made by the society. The sub-rule lays down that
contribution in any one year shall not exceed two percent of the net profits and
contribution to this fund shall cease when the amount of the funds amounts to nine
percent of the paid-up share capital of the society. The society may draw upon this fund
in any year only when it is unable to maintain a uniform rate of dividend it has been
paying during the preceding five years or more. It is thus clear that the fund can be drawn
upon only in lean years when the society is unable to maintain a uniform rate of dividend
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on its shares and will not be available to increase the rate of dividend in any year to a level
above that at which it has been paying during last five years or more, subject to the
recommendation of the rate by the Board of Directors, which cannot be changed by the
General meeting as per provisions of the sub rule (4) of the rule 52 of the Maharashtra
Cooperative Societies Rules 1961.
12.Other funds and provisions – Funds to be charged to profits and to be created out of
profits- The term “ fund ” as already stated, it very loosely used in the Act and the Rules.
It is used to describe not only funds created out of profits, but also other amounts charged
to profits or set apart, not only out of profits, but also out of realizations for meeting
unforeseen losses and undetermined liabilities, which should be appropriately shown
under the heading “ provisions”. However, since the Act does not make any distinction
between reserves and provisions, the nomenclature specified in the byelaws of the society
to describe these funds or provisions, may be used for purpose of balance sheet. Section 65
and Rule 49 A of the Maharashtra Co-operative Societies Act permits societies to create a
number of funds and reserves out of there annul profits. Creation of some of the funds in
compulsory under the provisions of the Act Rules and byelaws of the society, while
financial prudence necessitated creation of some other funds and provisions. The
nomenclatures of these funds and provision generally indicate the purposes for which they
have been created and are being maintained. Thus, Bad Debts Fund and Provision for Bad
Debts as already explained is maintained and has to be utilized for writing off bad debts.
Charity Fund is created and maintained for payment of charities. Building Fund is created
to enable the society to conserve funds to have a building of its own. Although, may of the
so called “ funds ” are in the nature of reserves and provisions, neither Form “ N ” nor the
instruction contained in the marginal notes against the various items require them to be
shown under their correct headings.
13.Legal provisions regarding creation and maintenance of certain funds- Funds

created by charging to profit and loss account: It has also to be noted that section 65
(2) of the Act does not make any distinction between funds contribution to which are to be
charged to profits and other funds which are to be created by way of appropriations of the
net profits except statutory reserve fund and bonus equalization fund, charity fund under
section 69. Auditors, however, should object to creation of funds and reserves, which have
not been specifically permitted under the provisions of the Act, Rules and the byelaws of
the society. Contribution to the following funds are required to be charged to the profits
for the year before arriving at the amount of net profits: -
(a) Co-operative education and training fund [Rule 49 A (ix)]
(b) provision for election fund for payment of election expenses; [Rule 49 A (x)]
(c) Bad Debts Fund and provision required writing off bad debts. [Rule 49 A (xi)]
(d) Investment Fluctuation Fund. [Rule 49 a (xiii)] [Rule 49 A (2)] and rule 51
(e) Share capital Redemption Fund. [Rule 49 A (xii)] and [rule 51(ii)
(f) Purchase rebate payable to members and non-member customers of consumers
societies (Patronage bonus) [Section 65(2)].
(g) Sinking Fund or guarantee Fund. [Rule 49 A (2)] and [Rule 51 (i)]
Under provisions of Rule 49 A, contributions to the following funds are required to be
made before arriving at the net profits as state above.
(1) Contribution, if any, to be made to any sinking fund or guarantee fund
constituted under the provisions of the Act, Rules or byelaws of the society for ensuring
due fulfillment of guarantee given by Government in respect of any loan raised by the
society.
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(2) Provision considered necessary for depreciation in the value of any

security, bonds or shares held by the society as part of its investments.
(3) Any provision required to be made for the redemption of share capital
contributed by Government or by a federal society.
These funds are compulsorily required to be maintained.
As regards amounts to be credited to these funds, it has to be noted that the amount to be
credited to the Share Capital Redemption Fund will depend on the period during which the
share capital has to be redeemed as per terms and condition laid down by Government
Similarly, the contribution to the sinking fund or guarantee fund will also be laid down by
Government and will depend on the amount of the guarantee given. The amount of the
Investment Depreciation Fund will have to be determined on consideration of the values of
the specific securities held by the society.
14.Funds created by appropriation of net profits: The Rule 50 (1) of the Maharashtra
Cooperative societies Rules 1961, provides that society may appropriate its profit for
education of members, any co-operative or charitable purpose including relief to pour,
education, medical relief and advancement of any other general public utility upto 20% of
the net profits. Rule 50 (2) provides for appropriation of net profit for creation of
following funds.
(a) Development fund
(b) Dividend Equalization Fund; and
(c) Any other fund created under bye-laws
Apart from the above provision the various sections provides the appropriation of
funds after arriving at net profit are 1) charity funds under section 69, and 2) reserve fund
under section 66 of the Act.
15. Charity Fund – Section 69 of the Maharashtra Co-operative Act permits a society to
create and maintain a charity fund out if its profits by crediting to this fund and amount
not exceeding 20 per cent of its net profits for the year. Out of this fund, donation and
charities can be made only with the with the approval of state federal society, as notified
by the State Government. The State Government has notified as the federal society for the
purpose is Maharashtra State Co-operative Union [Notification No.WPC.2872/10211/C-5
Dated 13.4.1972.]. Donations approved under the Income tax Act can, however, be
debited as trade expenses, but other payments by way of donations, contributions to funds
or by way of charities will have to be made only out of the Charity Fund created under
provisions of this section and approval of the State federal society notified by the State
Government, will have to be obtained. It should also be seen that the limit of 20 per cent
laid down in the Act is not exceeded. This limit as we have already seen includes donation
in the form of advertisements in souvenirs, etc. It has, however, to be noted that approval
of the State federal society in necessary for payments to be made out the Charity Fund and
not for setting aside or crediting amount to the Charity Fund out of the annual profits. “
Charitable purpose “ under section 2 of the Charitable Endowments Act, 1860, includes
relief of the poor, education, medical relief advancement of any other object of general
public utility, but does not include a purpose, which relates exclusively to religious
teaching or worship.
16. Provision for Overdue Interest – As we have seen, Rule 49 A of the Maharashtra Co-
operative Societies Act clearly lays down that all interest accrued and accruing in
accounts, which are overdue, should be excluded from the amount of the net profits.
Overdue loan accounts are those accounts in which the principal or any installment, which
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has fallen due, has been defaulted. If interest not actually realised, i.e. interest receivable,
has been included in profits, it is necessary that portion of interest receivable, which is
overdue, should be deducted. This is done either by debiting the interest account and
crediting the “ Provision for Overdue Interest ” account, or by deduction overdue interest
from the total amount of interest. Either way, it should be seen that no overdue interest is
taken to profits. This has been dealt with separately. For urban banks, and District Central
and state cooperative banks various guidelines are issued by the Reserve bank of India/
Nabard should be adhered to.
17.Contingent liabilities – It is possible that there may arise in future liabilities relating to
transaction effected in the past. Thus, for example, bills might have been discounted
before due dates, cheques might have been credited to accounts by the Bank before their
realisation and similar other cases like the discounting of hundies, etc. The society may
also be holding certain partly paid shares on which full amounts have not been paid.
Guarantees issued by the society may still be outstanding. There may also be pending
arbitration cases and suits filed in the civil courts against the society, results of which have
not been known. There might also be claims made which might not have been accepted by
the society such as income tax or other taxes. The auditor should enquire into all such
matters with a view to ensure that adequate provision is made in the accounts for these
liabilities. Ordinarily, unless the liabilities are definite, provision is not made in the
accounts. However, the position is required to be made clear by means of a footnote below
the balance sheet.
18.Arrangement and groping of liabilities and disclosures – From “ N ” Liabilities – The

following are the instruction contained in the marginal notes regarding the manner in
which the various items of liabilities are to be shown in the balance sheet. These are kind
of disclosures to the balance sheet. Corresponding figures at the end of the previous year
are required to be shown.
I. Share capital – Share capital contributed by Government and by co-
operative societies and different classes of individual members are to be shown
separately. Terms of redemption or conversion of any redeemable preference shares
need to be mentioned.
Summary of authorised and subscribed share capital distinguishing between the
various classes of capital, number of total shares to be issued and face value of each share
needs to be shown separately. Calls in arrears are to be shown as a deduction from
subscribed capital and calls received in advance as an addition.
Subscriptions received towards shares and amounts credited to Share Suspense
Account pending transfer to share capital account are to be shown as a separate item.
II. Reserve Fund and other funds- (a) Statutory Reserve Fund (i.e. Reserve
Fund created and maintained under Section 66) and other reserves and funds are to be
shown separately.
(b) Additions and deduction since last balance sheet are to be shown under each of the
specified heads.
(a) Funds in the nature of reserves and funds created out of profits for specific
purposes are to be shown separately.
Funds are required to be shown under various heads: -
III. Staff provident Fund – Staff Provident Fund and any other fund such as
insurance or bonus fund, gratuity fund etc., maintained for the benefit of the employees
need to be shown separately.
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IV. Secured Loans- The nature of the security should be specified in each case.
Where loans have been guaranteed by Government or State Co-operative Bank or
Central Co-operative Bank, a mention thereof should also be made together with the
maximum amount of such guarantee. Loans from (1) Government, (2) State Co-
operative Bank or Central Co-operative Bank State Bank of India and other banks
should be shown separately.
Secured loans should further be classified as per “N” form
V. Deposits – Deposits from societies and individuals should be shown
separately.
Deposits should be classified as per “N” form
VI. Profit and loss account
Profit for the last year
Less – appropriations
Add- current profits.
VI. Contingent Liabilities, which have not been provided for, should also be
mentioned in the Balance Sheet by way of a footnote.
CHAPTER VIII
ACCOUNTING STANDARD (POLICIES)
1) Introductory: The auditor has to certify the true and fair position of the
financial statements, as per M.S.C. Act, however, what constitutes “ true and fair” view
has not been defined in Companies act as well as cooperative Societies act. Considering
this, the Institute of Chartered Accounts of India has constituted Accounting standards
Board and the Auditing practices Committee, has issued accounting standards, and
standard auditing practices. The intention behind this is, to describe the accounting
principles and the methods of applying these principles in the preparation and presentation
of financial statements so that they give a true and fair view.
2) In the preface to the statements of accounting standards, the committee has
stated that, while discharging the Statutory Auditors their attest function, it will be the
duty of the Statutory Auditors to ensure that the Accounting Standards are implemented in
the presentation of financial statements covered by their audit reports. In the event of any
deviation from the standards, it will be also their duty to make adequate disclosures in
their reports so that the users of such statement may be aware of such deviations. The
Statutory Auditors have to insure whether societies have followed the Accounting
Standards in preparation of accounts and presentation of financial statements, if not, they
have to qualify their report accordingly. The Statutory auditors who do not follow the
instructions containing Government notification will be deemed to be negligent in carrying
out their duties and necessary disciplinary action will be taken against such auditor
including removal from panel.
3) Applicability to Cooperative Societies: There is provision in the Cooperative
Societies Rules, Rule no. 69(3), that auditor shall state “whether in his opinion accounting
policies adopted by societies are as per accounting standards laid down by State
Government or by ICAI, New Delhi. The Reserve Bank of India has issued some
instruction regarding applying accounting standards and disclosures to the financial
statements in regards of Cooperative Banks.
4) Accounting standards: uptill now the Institute of Chartered Accountants of
India issued 28 Accounting Standards as detailed below. The standards which can be and
how would be applied to the various types of societies is mentioned in notification issued
by Government of Maharashtra. For applicability purpose, societies are classified in 3
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categories and standards which apply to every category is given against that category
which is as follows.
1 Level one a) Banks
Societies b) Societies whose turnover (excluding other income) exceeds Rs. 50
crores in immediately preceding accounting year
c) Societies having borrowing including deposits exceeds Rs. 10 crores
at any time during immediately preceding accounting year.
2 Level Two a) Societies having turnover (excluding other income) exceeds Rs. 1
Societies crore but does not exceed Rs. 50 crores in immediately preceding
accounting year.
b) All societies having borrowing (including deposits) exceeds Rs. 1
crores but does not exceed Rs. 10 crores at any time during
immediately preceding accounting year.
3 Level a) Societies not covered in (1) and (2) above
Three
Societies
5)
6) Applicability of Accounting Standards (AS) to different Level of Societies :
Sr. Level of Societies Applicable AS
No.
1 Level one Societies AS 1,2,3,4,5,6,7,9,10,11,12,13,14,15,16,17,18,19,20,
22,24,26,28,29
2 Level Two Societies AS
1,2,4,5,6,7,9,10,11,12,13,14,15,16,18,19,20,22,24,26,28,29
3 Level Three AS 1,2,4,5,6,7
Societies
7)
AS 9,10,11,12,13,14,15,16,19,20,22,26,28,29
8) Note : Applicability of AS 19,20,28,29
9)
10) There are some exemptions in application of certain matters to Level 2 &
Level 3 Societies as follows :
AS Levels II Societies Level III Societies
19 Certain disclosures relating to Same as level II entities. Further
reconciliation and break up of minimum disclosure of accounting policy of
sublease payments, minimum sublease initial direct costs is not applicable (i.e.
payments and general descriptions are not paragraphs 37 (g) and 46(e).
applicable (i.e. paragraphs 22(c), (e)and (f);
25(a), (b)and (e); 37 (a) and (f); and 46 (b)
and (d)).
20 Diluted earnings per share (both including Same as level II entities. Further,
and excluding extraordinary items) is not information required by paragraph
required to be disclosed. 48(ii) is not required to be disclosed.
28 Have an option to measure 'value in use' on Same as level II entities.
the basis of reasonable estimate thereof
instead of using present value technique.
Consequently, if they exercise that option,
the relevant provisions of AS 28 such as
discount rate etc. and the disclosure
requirements of paragraph 121 (g) will not
be applicable.
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29 Paragraphs 66 and 67 relating to certain Same as Level II entities.

disclosure not -applicable
11)
12) These accounting standards are available on website of
Institute which is www.icai.org
13) These Accounting Standards are as follows.
Sr. Accounting
Name of Accounting Standard
No. Standard No.
1 1 Disclosure of Accounting Policies
2 2 Valuation of Inventories
3 3 Cash Flow Statements
4 4 Contingencies and Events Occurring after the Balance Sheet Date
5 5 Net Profit or Loss for the period, Prior period items and Changes
6 6 Depreciation Accounting
7 7 Construction Contracts
8 9 Revenue Recognition
9 10 Accounting for Fixed Assets
10 11 The effects of Changes in Foreign Exchange Rates
11 12 Accounting for Government Grants
12 13 Accounting for Investments
13 14 Accounting for Amalgamations
14 15 Employee Benefits
15 16 Borrowing Costs
16 17 Segment Reporting
17 18 Related Party Disclosures
18 19 Leases
19 20 Earnings per share
20 21 Consolidated Financial Statements
21 22 Accounting for Taxes on Income
Accounting for Invt. in Associates in Consolidated financial
22 23
statements
23 24 Discontinuing Operations
24 25 Interim Financial Reporting
25 26 Intangible Assets
26 27 Financial Reporting of Interests in Joint Ventures
27 28 Impairment of Assets
28 29 Provisions, Contingent Liabilities and Contingent Assets
CHAPTER IX
AUDIT REPORT AND FOLLOW-UP OF AUDIT
IX-1 Standards on Auditing (SA)

Consequent upon 97th amendment in Constitution of India, certain
amendments are made in Maharashtra Co-Operative Societies Act 1960 w.e.f 13th day of
August - 2013 Section 81 (2) is amended as under.
"The audit under sub-section (2) of Section 81 of the Act shall be
carried out as per Auditing Standards notified by the State Government from time to
time"
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Therefore, it is necessary to notify Auditing Standards. The institute of

Chartered Accountants of India, New Delhi has issued 37 Auditing Standards so far.
Government Of Maharashtra here by notifies that the Auditing, Review and Other
Standards as notified by ICAI, New Delhi are applicable to audit of Co-Operative
Societies to the extent applicable to respective Audit. These Auditing, Review and Other
Standards are issued and updated by the Institute of Chartered Accountants of India and
are available on website of Institute which is "www.icai.org" All auditors (Government
auditors, Chartered Accountants, Certified Auditors) should comply with auditing
standards. Non-Compliance with auditing standards by auditors will amount to negligence
in duties and necessary action will be taken against auditors.
Particulars of Auditing Standards is as follows.
Sr. Auditing
Name of Auditing Standard
No. Standard No.
1 200 Overall Objectives of the Independent Auditor
2 210 Agreeing the terms of Audit Engagements
3 220 Quality control – an audit of financial statements
4 230 Audit documentation
5 240 The Auditors responsibilities relating to Fraud
6 250 Consideration of Laws and Regulations in an Audit
7 260 Communication with those charged with Governance
8 265 Communicating Deficiencies in Internal Control
9 299 Responsibility of Joint Auditors
10 300 Planning an Audit of Financial statements
11 315 Identifying and Assessing the risks of Material Misstatement
12 320 Materiality in Planning and Performing an Audit
13 330 The Auditors responses to Assessed Risks
Audit considerations relating to an entity using a service
14 402
organization
15 450 Evaluation of Misstatements identified during the Audit
16 500 Audit Evidence
17 501 Audit Evidence – Specific considerations for selected
18 505 External confirmations
19 510 Initial Audit engagements – Opening balances
20 520 Analytical procedures
21 530 Audit Sampling
22 540 Auditing accounting estimates
23 550 Related Parties
24 560 Subsequent Events
25 570 Going concern
26 580 Written Representations
27 600 Using the work of another Auditor
28 610 Using the work of Internal Auditors
29 620 Using the work of an Auditors Expert
30 700 Forming an opinion and Reporting financial statements
31 705 Modifications to opinion in the Independent Auditors
32 706 Emphasis of matter para and Other matter paragraph
33 710 Comparative information – Corresponding Figures
34 720 The Auditors responsibility in relation to other information
35 800 Audits of Financial Statements prepared in accordance
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36 805 Special considerations – Audits of single financial statements

37 810 Engagements to report on Summary Financial Statements
IX-2 Audit Files

A. Maintenance of audit files. -For the efficient conduct of any audit and satisfactory
reporting, it is necessary to collect all information of importance into a properly kept file,
which should contain all the documents, working papers, schedules and the audit notes and
queries taken down during the course of audit. In order to avoid overloading of the file, the
Registrar has directed that all documents of permanent interest should be segregated from
routine working papers and schedules and kept in a permanent file called the “A” file,
which should be maintained by the auditor for each society in his charge. This “A” file
should contain a copy of the registered byelaws of the society and subsequent amendments
received from the Registrar along with business rules and other rules and regulations
framed by the society such as staff Provident Fund Rules and Service Rules, Rules for
payment of allowance and reimbursement of expenses incurred by the directors and the
staff, etc. Papers of current importance, such as schedules, bank reconciliation’s, balance
certificate obtained from Banks etc., should be filed in a “Current file”, along with audit
notes and queries taken down during the course of audit.
The “A” file should also have a separate section for recording matters of permanent
interest such as list of account books, names of officers and extent of their authority. A
brief resume of arrangements for internal control, deficiencies and weakness of internal
check, accounting and sanctioning procedure, presentation of accounts, creation and
maintenance of various files, etc., should be kept in the same file. Details of important
contracts or agreements relevant to the audit and also all matters, which may obviate the
lengthier and not so easy process of referring to various original documents, may also be
included. It also includes the important resolutions of the board of directors, General
meeting or any other committee, financial statements of audit period, ratio analysis
records, and communication with the management. Audit program, audit allotments and
worksheet of the staff, copies of letter issued for confirmation and confirmations received,
explanations obtained from the ex employees and working employees or member or
directors of the society, copies of various information received from the society should be
maintained as a current file for the year under audit.
In carrying out audit following points should be considered by auditor and
necessary remarks should be included in his audit report and also maintain the record
thereof in his audit file.
I. Internal Check.
(I) In what respect the system of internal check is defective.
(II) Possibility of collusion between members of staff.
(III) Reliability of otherwise of the officers handling cashbook and personal ledgers and
any change necessary.
(IV) Any other remarks.
II. -Staff.
Integrity of staff in general.
III. -Audit.
(a) What portion of transactions is not audited?
(b) Percentage checking done in regard to what items.
(c) What transactions require particular attention?
(d) Other loopholes noticed, Benami transactions suspected, etc.
(e) Accounts of different nature merged in one another, business not allowed by the
byelaws, but carried on in the name of Managing Director or other officer of the society.
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(f) Any doubt or suspicion felt at the time of checking cash, securities or godowns or any
other transaction of the society or Bank.
(g) Any other remarks concerning audit.
IV. -Directors and their interest.
(i) Directors and their relationship, if any, with any member of the staff.
(ii) Indirect transaction carried on by Directors with the society, if any. Abuse of powers
and their position by any of the directors or any indirect undue advantage taken by any of
them.
(iii) The degree of control exercised by the Manager or the Managing Director over the
senior members of the staff and the degree of control exercised by the senior officers over
the rest of the staff, capacity of staff for their work.
(iv) Behavior of the staff towards the members of the public and the relationship of the
society with other institutions.
(v) Any other remarks.
While laying down the above procedure, it is not the intention that the auditors should
necessarily try to collect the above information, but, if in the course of their audit, they
happen to come across any such information, they should note it in the audit files and
necessary remarks should be given in the audit report. It is also not intended that they
should confine themselves only to the points mentioned above. They may, if they think
necessary, mention any other points not mentioned above.
IX-2. AUDIT NOTES AND QUERIES.
3. Rectification on the spot. - During the courses of his audit, the auditor will have to
mark his own notes about the working of the society, the irregularities noticed by him also
points which require further clarification or explanation. All the minor defects and
irregularities should be got corrected and rectified as and when they are noticed so that the
management would be careful to avoid recurrence of such irregularities. As they are raised
rather than taking exhaustive notes and attending to them later on to get cleared. Even
matters, such as want of sanction, unattested corrections, unsigned documents, incomplete
statements, etc., should also, wherever possible be got rectified on the spot and need not be
reduced to writing unless they are considered important enough to be mentioned in the
audit memo. Where additional particulars or further clarifications or explanations are
required, these should be obtained during the course of audit as and when the points arise
and should not be left over to be explained later on after the audit is completed. However,
notes will have to be made of all objectionable items and serious irregularities and even of
the minor irregularities, if they occur so frequently that they are required to be pointed out
in the audit memo in a general way. Some of the queries and objections may also be of
such importance that they may have to be discussed with responsible officers of the
society. This should be done as promptly as possible before the audit report is drafted.
4.Writing out audit objections: - Query Sheets- All audit objections or queries as they are
called should be written legibly on the left side of the objection memo or query sheet as it
is called and sufficient space should be left on the right hand side for the replies by the
management. Full particulars of the transaction such as date, amount, name of the party,
receipt or voucher number, cashbook or ledger folio, etc., should be mentioned and the
nature of the objection raised or the clarification or explanation considered necessary
should be clearly indicated. Against each query, the information sought or clarification
required or the reply of the management is to be furnished. If the reply or the clarification
or explanation is considered satisfactory, the objection raised may either be scored out or a
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distinctive tick indicating complete satisfaction should be made under initials of the
auditor. However, since in the smaller societies, the secretary himself writes the accounts
and there are no full-time employee, instead of reducing to writing every query or
objection, the auditor may be intelligent to question and obtain necessary clarification on
the spot so that it may not be necessary to make note of either the objection or the reply
unless it is considered to be important enough to merit its inclusion in the audit memo. It
has also to be noted that it may not always be possible to obtain written explanation or
reply from the secretary every time. In such cases, the oral reply or explanation of the
secretary or other office-bearer should be noted against the query along with the name and
designation of the officer furnishing the reply or explanation. For the ready reference a
query sheet is given below.
Query sheet: No. Confidential / non confidential Date:
To,
The Chief executive Officer/ Managing Director
…Cooperative Society
Subject: Audit information regarding…
Sir,
Please refer to the subject cited above,
An addition information / explanation is required in the points raised below. You are
requested to submit the information against the query in the provided margin. And submit
to this office within 24 hours, with duly signed.
Sr. No. Query for which explanation/ Reply or Explanation from
information is required. the management
If the provided margin is not sufficient to reply, please enclose separate sheet of reply with
this query sheet, and return the query sheet in origin.
Sd/- Sd/-
Statutory Auditor CEO/MD or authorized officer
5.Usual audit objections. -The usual audit objections would ordinarily be of the following
types: -
1) Unattested corrections, unsigned documents, incomplete documents and statements, i.e.,
documents in which spaces have been left blank or otherwise incomplete.
2) Mistake in calculations, extensions and totals, wrong calculation of interest, dividend
rebate, etc., incorrect receipts or payments resulting from application of wrong, rates,
incorrect calculations, extensions or totals.
3) Cancelled receipts or cheques, the original or the outer form of which have not been
attached to the office copy (carbon copy) or the counterfoil.
4) Remittances received for which official receipts from the printed receipt from the
printed receipt books or other official acknowledgements have not been made.
5) Payments for which vouchers are not available. List of missing vouchers should be
separately prepared giving full particulars of the payments for which supporting vouchers
have not been obtained.
6) Defective vouchers such as (a) vouchers in which full particulars are not mentioned, (b)
Payment made to a person other than the payee without written authority of the payee, (c)
Payments for which supporting documents or sub-vouchers have not been attached to the
voucher, (d) Vouchers which are not stamped, (e) Vouchers which are not in proper form
187
or are not in the name of the society, but are addressed to the Chairman, Managing
Director, Directors, Manager or the Secretary (by personal name with or without
mentioning designation) individually.
7) Receipts or vouchers which do not agree with the entries in the cashbook in some
material respects, such as date, amount, name of payee, head of account to which credited
or debited, etc., receipts or vouchers in which the amount in words and figures does not
agree.
8) Defective loan bonds, agreements, promissory notes, etc. Also incomplete documents
and statements, i.e., documents in which spaces have been left blank, unsigned or
unattested documents and statements.
6.Objectionable expenses. They include-

(a) Expenses which are not incidental to the business of the society or do not seem to have
been incurred for the purposes of the society.
(b) Expenses considered heavy or abnormal considering the size of the institution, the
nature of its business and importance of the occasion.
(c) Unfructuous expenses, i.e., expenditure, which bring no return or other wasteful
expenditure.
(d) Other irregular expenses such as personal expenditure of the directors or officers paid
by the society.
(e) Expenses, which are not properly sanctioned.
(f) Irregular loans and advances such as: -
(1) Loans made to non-members or on the suretyship of non-members.
(2) In agricultural credit societies, loans made without obtaining declarations creating
charge on the land of the borrowers.
(3) Unauthorized loans to members of the committee, secretary or other officers.
(4) Loans, the amount of which exceed the individual limits mentioned in the byelaws, or
the credit limits sanctioned in the normal credit statements as finally approved by the
bank. Also, special loans for which approval of the bank and or the Register, have not
been obtained.
(5) Loans, which are against the provision of the Act, Rules, and byelaws directions,
issued by the Registrar or the Central Bank. Loans and advances made in contravention of
the orders of the Registrar issued under provision of Rule 42 of the Maharashtra Co-
operative Societies Rules.
(6) Benami loans, i.e., loans, the amounts of which are persons other than the borrowers.
(7) Imprudent advances such as loans, which are not properly, secured, loans of minors,
loans sanctioned for purpose not permitted by the byelaws, etc.
(g) Sales made on credit where no provision for credit sales exists in the byelaws. Also,
credit sales in excess of credit limit sanctioned.
(h) Investment or employment of funds in a manner not permitted under the Act, the rules
or byelaws of the society or against the directions of the Registrar or the Central Bank.
(i) Other transactions, which involve breach of the provisions of the Act, Rules or the
byelaws of the society.
7.Special Notes regarding serious objections. - Besides routine audit objections

enumerated above, the auditor will have to make his own notes of the more serious
irregularities, which cannot be got rectified on the spot and which call for special action on
the part of the committee. There might also be other matters, which require to be brought
to the special notice of the general body or of the Registrar. The following are matters in
respect of which the auditor will have to make special notes: -
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(1) Unusual matters, which call for specific explanation.

(2) Expenditure of a revenue nature, which has been capitalized.
(3) Unsatisfactory arrangements for custody of cash, securities, stores and other property,
control over receipts and disbursement of funds, defective system of accounting, failure to
maintain necessary account books and registers, incomplete accounts, deficiencies in the
arrangements for internal check, defective store control, etc.
(4) Cases in which the normally accepted canons of business and financial
propriety are not observed.
(5) Transactions not adhering to the standard accounting policies effecting
profit and loss account and Balance sheet.
(6) Entries in the books, which appear to be misleading or passed intentionally with a view
to concealing irregularities.
(7) Cases in which the provisions of the Act, Rules and of the byelaws have been
infringed, such as failure to hold general meeting, irregularities in the election or
appointment of officers, failure to hold committee meetings regularly, transaction of
business without quorum, etc., misuse of delegated authority or exercise of owners in
excess of delegated authority.
(8) Activities undertaken, such are not covered by the object clause of the byelaws.
Employment or utilization of funds for business that is not permitted under the Act, Rules
or byelaws of the society.
(9) Borrowing exceeding the limit laid down by byelaws without prior permission
of the Registrar.
(10) Particulars of amounts, which ought to have been but have not been brought into
account. Irregularities in the realization of amounts due to the society.
(11) Advances taken by office bearers and members of the staff, which have not been
accounted for and remain to be recovered.
(12) Loans and advances which have become irrecoverable or are not likely to be
recovered in full. Other bad debts and losses, which could have been avoided.
(13) Property held by the society, which is not likely to fetch its full value. Property,
which have no clear title, and requires to regularised in the name of the society.
Investment, which cannot be realized, or the market value of which is less than their book
value.
(14) Particulars of losses other than normal trade, losses for which the committee or other
office-bearers could be hold liable. Cases in which members of the committee or officers
have taken advantage of fluctuation in market and have benefited themselves.
(15) Moneys and other property of society, which has been unauthorisely, retained by any
of the office-bearers.
(16) Inefficient working of manufacturing and processing units, abnormal wastage’s and
manufacturing losses.
(17) Missing loan bonds and other documents, such as promissory notes, applications,
agreements, etc.
(18) Other matters considered important by the auditor.
8.Recording information of confidential nature. - In addition to the audit objections and

informative notes taken down by the auditor, certain additional information of a
confidential nature about the working of the society and its financial position to the
conduct of the office-bearers, and the manner in which the affairs of the society are being
managed will have also to be collected by the auditor and referred to whenever necessary
so that he would always be on his guard and will not be deceived. It is likely that the
auditor during the course of his audit might come across transactions, which might not
189
have been in the interest of the institution, or which have been entered into primarily with
a view to benefit certain individuals. There might also be entries in the books of accounts,
which might arouse his suspicions. It would be the duty of the auditor to make notes of all
matters which appear to be rather out of the way and probe them to the bottom so as to be
satisfied that no serious irregularities lie hidden. It has to be remembered that in the
minds of the public at large, detection of frauds is such an important function of the
auditor as to overshadow his other functions. Members and creditors of societies believe
that the appointment of the auditor by the General Body or by Registrar would adequately
safeguard their interests although honesty and integrity are not given sufficient
consideration while electing office bears. The auditor has, therefore, to approach very
cautiously. He need not, however, approach his work with the feeling that there is always
something wrong with the society or that he has to deal with people who are not quite
honest. He is entitled to believe that everybody is honest. At the same time, if he fails to
take note of transactions which are irregular or overlooks entries which appear to be out of
the way, in the belief that everything is alright with the society or that the integrity and
honesty of the office-bearers should not be doubted, he is likely to be deceived and frauds
and serious irregularities might remain undetected for which he might subsequently be
held liable. If brief notes are taken of all unusual matters, the auditor would be put on his
guards and it would be easy for him to determine which are the matters, which call for
greater attention and detailed scrutiny.
IX-3 DRAFTING OF THE AUDIT REPORT

9.Legal position regarding submission of audit report. - Filling in printed audit memo
form.- The auditor is require to submit the following documents being part of audit report.
Sr.No. Particulars Specified / Remarks Draft /
Provided by Specimen
Annexure
number
1 Audit Under Sub- Form N 1 for co-operative banks
memorandum Rule 3 of Rule and N 2 for other type of societies.
(audit 69 The certificate also shall quantify
certificate) shortfall in various provisions over
profit or loss and state clearly that
after considering the effects of all
provisions whether there is profit
or loss to the society / over
statement or under statement of
profit.
2 Audit report Section 81 (5 Audit report should be made in
b) and Sub- three parts as under
Rule 3 of Rule Part A :- it should include
69 / Specified (a) fraud
by the (b) misutilisation of funds
Registrar. (c) misapplication of funds
The Registrar (d) manipulation of accounts
has stated in (e) falsification of accounts
his circular No. (f) auditor shall quantify shortfall
ADT/H- in various provisions over profit or
1/A.M.dated loss and state clearly that after
10th December considering the effects of all
190
1986 to write provisions whether there is profit

on the points or loss to the society.
mentioned in (g) serious infringement of
the sub section provisions of Act, Rules, Byelaws
(2) of the and notification.
section 81 of (h) misutilisation of capital / loan /
the Act. For grant received from Government.
purpose of (i) personal expenses which are
clarity, the debited to Profit and loss account.
Registrar has (j) contravention of cash limits as
directed in the per Rule 107 (c).
ADT/243/dated (h) payment in cash in excess of
12th March the limits laid down in the Income
1974 and Tax Act as per Rule 107 (d).
circular No. Part B :-
ADT/ H-1/ (a) remarks on scrutiny of Balance
lepahawal/ sheet and Profit and loss account.
rachna/ dated (b) deficiencies in working of
19th May 1997. societies.
that the report (c) activities undertaken beyond
should be the object of society
divided into (d) observation on meetings of
three parts as AGM, BOD and committee
part A, Part meetings.
B, and part C: (e) remarks on growth or decline
in deposit / capital / loan / profits
etc. and important ratio analysis.
(f) contravention of provisions of
other allied Act like Stamp Act,
Labour laws, Contract Act, etc.
Part C :-
(a) deficiencies in vouching,
receipts, expenditure voucher.
(b) unauthorized / not sanctioned
expenditure.
(c) expenditure which appears to
be excessive to the auditor
considering the size and volume of
society.
(d) general deficiencies observed
in loan documents.
(e) travelling expenditure of Board
of Directors and Staff members
beyond their powers and which
appears to be excessive.
3 Audit memo Specified by Form no.1 – mandatory for all

Registrar . types of societies.
Form no. 2 and onwards :-
depending on type of society.
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4 Specific Section 81 (5 In respect of fraud, this report is to

Report B) be submitted to the Registrar
within 15 days from the date of
audit report and file FIR with the
permission of Registrar
5 Special Section 81 (5 In respect of financial
Report B) irregularities resulting into loss to
the society, auditor has to file
special report along with audit
report.
6 Financial Rule 69 (3) The auditor is required to duly
Statements certify the following statements
approved by the management.
(a) Balance sheet as on close of
co-operative year.
(b) Profit and Loss account
(income and expenditure account)
for the co-operative year /
particular period.
(c) notes on accounts and
accounting policies.
(d) cash flow / receipt and
payment.
(e) schedules forming part of
Balance sheet and profit and loss
account (income and expenditure
account).
7 Long Form As specified by In case of Urban co-operative
Audit Report Reserve Bank bank, State Co-operative Bank,
of India District Central Co-operative
Bank, auditor shall prepare and
submit Long Form Audit Report
along with Audit Report.
8 General As may be Repeated mistakes like vouchers
Remarks required while are not having signature of
drafting LFAR approving authority, not signed by
and audit payee, vouchers are not numbered,
memo. cash book, bank book are not
numbered, required supplementary
documents / evidences are not
attached with vouchers,
suggestions for improvements, etc.
9 Audit As specified by Auditor shall prepare the audit
Classification the Registrar in classification mark sheet and
Mark sheet case of award audit classification which
societies and in should form part of Audit Report.
case of bank as
specified by
Reserve Bank
of India and
192
Nabard.
10 Schedules Section 81, Schedule 1 - All transactions
Rule 69 (6) which appear to be contrary to the
provisions of Act, Rules and
Byelaws.
Schedule 2 – All sums which
ought to have been accounted but
not brought into accounts.
Schedule 3 – All material
improprietory and irregularity in
expenditure or in realization of
money due to the society.
Schedule 4 – All moneys and
properties of the society which
appears to the auditor bad or
doubtful of recovery.
Schedule 5 – If government
assistance is received, but not
applied for the purpose for which
it was granted.
Schedule 6 – Personal expenditure
debited to revenue.
11 Audit Report As provided by Auditor should prepare summary
summary Rule 69 (7) of important points contained in
(Executive his report for being read out in the
summary) annual general meeting. This
summary should contain all the
important points omitting the
descriptive portions. It is not
necessary to repeat the entire list
of irregularities, but the more
serious and important once may be
mentioned inviting reference to
the respective paragraphs in the
general remarks. The summary of
the audit memo along with the
explanation of the management
should be placed before the annual
general meeting for its
consideration.
Whatever is contained in Special Report and Specific Report should also form part
of Part A of the Audit Report.
All the queries and sub-queries in the printed audit memo should be gone through
carefully and appropriate reply given against each query. The replies should be brief and
to the point. All sub-queries should be reply separately. There should be no vagueness
about the information furnished or the marks made against any query. If the reply to any
query cannot be accommodated in the space provided for it, the point may be clarified in
the “General Remarks” and the reply to the query may only invite attention to the
relevant paragraph in the “general remarks” along with page number of audit report or the
separate report accompanying the audit memo. All information furnished should be correct
193
and should always agree with the information contained in the finals accounts, lists of
overdues, schedules and other statements accompanying the audit memo. The
questionnaires which shall be used to which types of societies is listed below.
Sr. Query sheet Type of society to which it is applicable. Draft / Specimen
No. form No. Annexure number
1 1 All types of Societies.
2 2 Test audit report for all type of societies
audited by the auditor
3 3 Agriculture Produce Market Committee.
4 4 District Central Cooperative Banks
5 5 Land Development Banks (Now
Agriculture and Rural Development Bank)
6 6 Agricultural and credit societies, multi
purpose societies, seva sahakari sanstha.
7 7 Urban Cooperative Banks
8 8 Salary Earners Societies
9 9 Agricultural Sale Purchase Society
10 10 Farming Societies
11 11 Lift Irrigation Societies
12 12 Crop Protection Societies
13 13 Ginning and Pressing Societies
14 14 Oil Mills
15 15 Rice mills
16 16 Agricultural and Industrial Processing
Societies
17 17 Sugar Factories
18 18 Industrial Sangh and Weavers Societies
19 19 Spinning Mill
20 20 Forest Labour's Societies
21 21 Labour Contract Societies
22 22 Dairy Societies
23 23 Dairy Union
24 24 Fisheries Societies
25 25 Poultry Societies
26 26 Piggary Societies
27 27 Consumers Stores and Societies
28 28 Housing Societies
29 29 Cooperative Producers Societies
30 30 Printing Press
31 31 Transport Societies
32 32 Industrial Estate
33 33 Education Societies
34 34 Supervising Unions regarding PACS at
Taluka and District level.
35 35 District Cooperative Boards
10.Certification of the Balance sheet and the profit and loss account. - Sub-rules (3) and
(4) of Rule 69 of the Maharashtra Co-operative Societies Rules, 1961, further require the
194
auditor to furnish a certificate regarding the correctness of the balance sheet and the profit
and loss account of the society examined by him. The provision is as under.
Rule 69 (3) :- The auditor shall ……… loss to the society.
Rule 69 (4) :- (i) to (iv)
IX – Contents of Audit Report

(a) Part A :- This part should consist of the serious irregularities, on which the registrar
has to take action immediately. Also contains the serious irregularities in administration of
the society, serious breaches of Act, rules and byelaws. Or the points which are required
for making the special Report, for taking actions against the Society, by the Registrar.
Part A of audit report shall generally include following items.
1. Fraud
2. Misutilisation of funds and properties
3. Misapplication of funds
4. Manipulation of accounts
5. Falsification of accounts
6. Auditor shall quantify shortfall in various provisions over profit or loss and state
clearly that after considering the effects of all provisions whether there is profit or
loss to the society.
7. Serious infringement of provisions of Act, Rules, Byelaws and notification.
8. Misutilisation of capital / loan / grant received from Government.
9. Personal expenses which are debited to Profit and loss account.
10. Contravention of cash limits as per Rule 107 (c).
11. Payment in cash in excess of the limits laid down in the Income Tax Act as per
Rule 107 (d).
12. In case of banks, property sold under Securitization Act 2002 below Reserve Price.
13. Contravention of unit exposure norms and sectoral exposure norms in case of
UCB, MSCB and DCCB.
14. Sanctioning of unsecured loans in excess of limits as specified by RBI in case of
banks and in excess of limits as specified in Byelaws in case of other societies.
15. Exceeding the borrowing power as specified by Section 43 and Rule 35 of MCS
Act.
16. Repaying the share capital by the contravening the Rule 23 of MCS Rules 1961.
17. No action against overdue in excess of one year.
18. Transactions with relatives of Board of Directors, companies, firms in which
directors are interested are not at the reasonable rates.
Format of Part A :-
The following are the major discrepancies found during the audit.
Sr.no. Particulars Instances / Examples which Auditor’s remarks
requires reporting
1 Fraud 1) Debiting excess amount During the period under
than the voucher amount / audit fraud of Rs.------ is
bill amount. detected. The said fraud
2) Withdrawing the amount has been committed by
from bank but not crediting using --------- modus
in cash book operandi (without security
3) Debiting the bank account / fabricated documents /
without depositing the false security, etc.). The
amount in bank following persons are
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4) disbursing loans without responsible for fraud.

sanction / without security / 1….
without loan documents / 2…
using forge documents 3…
5) any other transaction with If there is no fraud, the
the intention to defraud the auditor should mention
society by any person. the following remarks.
“During the audit period,
we have not found any
fraud”. This remark is
mandatory.
2 Misutilisation of When the funds are not used During the audit period,
funds and properties by following due procedures funds and properties of
E.g. societies are misutilised
1) purchasing / constructing as under :-
building without inviting the 1…
tenders 2…
2) purchasing the computers 3…
without inviting the tenders. In case, there is no
3) selling the movable / misutilisation of funds
immovable properties and properties, he should
without inviting bids give following remarks.
4) selling the movable / “During our audit period,
immovable properties below we have not found any
Reserve Price (Upset price) misutilisation of funds
and properties”
This remark is mandatory.
3 Misapplication of If the society raises the fund During our audit period,
funds for the particular purpose but we have found following
uses them for another misapplication of funds.
purpose, then there is 1…
misapplication of funds. E.g. 2…
1) State Government has 3…
granted loan for construction If there is no
of go-down, but use for misapplication of funds,
payment of salary or other auditor should make
regular payments. remark as under.
2) Use of sinking fund for “During our audit period,
day to day maintenance we have not found any
without passing required misapplication of funds.”
resolution in General Body. This remark is mandatory.
3) Use of revenue reserve /
general reserve for creating
Reserve for Bad and
Doubtful Debts.
4) Not using Government
share capital redemption fund
for repaying Government
debt / capital on due date.
4 Manipulation of 1) Crediting interest received We have found following
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accounts account without being manipulation / window

amount actually realized In dressing of accounts
contravention of Income during our audit period.
Recognisation Asset 1…
Classifaction (IRAC) norms. 2…
2) Loans showing to be 3…
recovered without actually If there is no
being recovered by debiting manipulation of accounts,
new loan account. then auditor should give
3) Window dressing of his remarks as under.
accounts. E.g. loan account “we have not found any
debit deposit account credit manipulation of accounts
without deposit actually during our audit period”
being received. This remark is mandatory.
5 Falsification of 1) Amount recovered from We have found the
accounts one party and credited to following falsification of
other party there by showing accounts during our audit
incorrect position of state of period.
affairs. E.g. A’s account has 1…
become NPA. B’s account is 2…
in PA category. Amount 3…
received from B is credited to If there is no falsification
A’s account to conceal NPA. of accounts, the auditor is
2) Showing stock items and required to give following
value of stock when there is remarks
no stock is in existence. “During our audit period,
we have not found any
falsification of accounts”
6 Quantify shortfall in Society has shown net profit Considering total shortfall
various provisions of Rs.1 crore and there is of Rs.115 lakh, society
shortfall in following has incurred loss of Rs.15
provisions. lakh instead of Net profit
1) NPA provision Rs.60 lakh of Rs.1 crore shown in the
2) Overdue Interest provision Profit and Loss account.
Rs.40 lakh If there are no shortfalls
3) Bonus provision Rs.10 in provisions, auditor
lakh should state “There are no
4) Gratuity provision Rs.5 shortfall in any
lakh provisions”
7 Serious infringement 1) Not holding Annual We have observed
of provisions of Act, General Meeting before 30th following infringement of
Rules, Byelaws and September as provided in provisions of Act, Rules
notification. MCS Act 1960. and Byelaws
2) Payment of dividend out 1…
of capital by not calculating 2…
net profit as per Rule 49 A. 3…
3) Not holding election even If there are no
after completion of tenure of infringement of Act,
197
Board of Directors as per Rules, Byelaws and

Section 73 (CB) (14) notifications, auditor shall
4) Receiving deposits from state “we have not found
non-members / public by co- any infringement of
operative society as per provisions of Act, Rules,
Section 43(1). Byelaws and
5) Providing loans to non- notifications.
members and to the persons
residing out of area of
operation as per Section 44.
6) Investment of funds in
contravention of Section 70.
7) Funds not to be used for
proceedings filed or taken
against officers in personal
capacity as per Section 71 A
8) Not investing Employee
Provident Fund as per
Section 71.
9) Payment of dividend in
excess of 15% as provided in
Section 67.
10) Appropriation of net
profit in contravention of
section 65 (2)
11) Non-creation of Reserve
fund as provided in Section
66.
12) Distribution of funds to
the members in contravention
of Section 64. E.g.
Distributing certain amount
as medical benefit to the
members in addition to
dividend.
13) Exceeding the borrowing
power as specified by Section
43 and Rule 35 of MCS Act.
14) Repaying the share
capital by the contravening
the Rule 23 of MCS Rules
1961.
8 Misutilisation of Non utilization of During the audit period,
capital / loan / grant government loan received for the society has received
received from construction of go-down and the government grant of
Government. using it for some other Rs…….. for ……
purpose. purpose and same has
been utilized for the same
purpose. We have not
found any misutilisation
198
of government loan.
This remark is mandatory
wherever there is
government loan / capital.
9 Personal expenses 1) Telephone expenditure of During the audit, it is
which are debited to personal nature of directors observed that, telephone /
Profit and loss and staff paid by society. vehicle expense of
account. 2) Use of vehicle for personal Rs…… incurred by the
purpose by directors and staff directors / staff has been
debited to Profit and loss
account. It is required to
be recovered.
10 Contravention of cash Cash holding limit as per During the audit, it is
limits as per Rule 107 Rule 107 (c) for credit observed that, on the
(c). society is Rs.25,000/- and if following days, cash on
actually cash maintained is hand has exceeded in
more than Rs.25,000/- for prescribed limit as per
more than 3 working days Rule 107 (c)
continuously. If there is no
contravention of cash
limits, auditor shall state,
“During the audit, we
have not observed any
contravention of Rule 107
(c)”
11 Payment in cash in As per Income Tax Act, any It is observed that,
excess of the limits payment exceeding following payments are
laid down in the Rs.20,000/- should be paid made in cash
Income Tax Act as only by account payee contravening the
per Rule 107 (d). cheque. If any payments are provisions of Income Tax
made contravening the above Act as per Rule 107 (d).
provision, the same should be If there is no
reported. contravention of cash
payment, auditor shall
state, “During the audit,
we have not observed any
contravention of Rule 107
(d)”
13 In case of banks, The flat acquired by the bank During the audit, it is
property sold under under Securitization Act observed that, following
Securitization Act 2002 has been sold for Rs.20 assets have been sold
2002 below Reserve lakh when the Reserve Price below the Reserve Price.
Price. was Rs.25 lakh 1…
2…
3…
If there is no sale below
the Reserve Price, auditor
shall state, “During the
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audit, we have not

observed any sale of
property below Reserve
Price”
14 Contravention of unit UCB has sanctioned loan of During audit period, we
exposure norms and Rs.40 lakh when exposure have observed that, bank
sectoral exposure limit was Rs.30 lakh. has sanctioned loan in
norms in case of Outstanding of this loan was excess of exposure limit
UCB, MSCB and Rs.45 lakh and limit was exceeded
DCCB. by Rs.10 lakh.
If there is no
contravention of unit and
sectoral exposure, auditor
audit period, we have not
observed any
contravention of unit and
sectoral exposure”
15 Sanctioning of Bank has sanctioned During the audit, we have
unsecured loans in unsecured loans totaling observed that, the bank
excess of limits as Rs.130 crores. The limit as has sanctioned the
specified by RBI in specified by RBI i.e. 10% of following limit in
case of banks and in total asset as per last audited contravention of RBI
excess of limits as Balance Sheet is Rs.110 directions.
specified in Byelaws crores. 1…
in case of other 2…
societies. 3…
If there is no
contravention of any of
the RBI guideline
regarding sanctioning
exposure norms, auditor
audit, we have not
observed any
contravention of RBI
guidelines regarding
unsecured loans, exposure
and any other guidelines”
17 Transactions with Computers are available in It is observed that, the
relatives of Board of market for Rs.50,000 of a society has entered into
Directors, companies, particular configuration, but transaction with the
firms in which purchased from director’s following companies in
directors are company for Rs.70,000. which directors or their
interested are not at relatives are interested
the reasonable rates. and the transactions are
made beyond reasonable
200
price.
1…
2…
3…
If there are no such
unreasonable transactions,
auditor shall report,
“During the audit, we
have not observed any
unreasonable transactions
with directors and their
relatives, companies and
firms.”
18 No action against For a prudent running of During the audit, we have
overdue in excess of business of credit, the observed that, society has
one year. societies required to recover not taken legal action for
the money regularly and for recovery in respect of
any default exceeding one following accounts even
year require to take legal though they are in arrears
action. In case the society has for more than one year.
fails to take such action, it 1) Sr.No. (2) A/c name
affects the continuity of (3) Amount overdue (4)
business and therefore the period of overdue.
auditor need to report such
accounts where actions are
not initiated which is
detrimental to the interest of
society.
(b) Part B :- This part is dealing with such matter as financial stability, loan policy,
progress of recoveries and position regarding overdues, mode of conducting business,
deficiencies in the arrangements for internal check, infringement of the provisions of the
Act, Rules, byelaws and circular instructions of the Registrar the general progress of the
society, its achievements and the degree of interest taken by the office-bearers and
ordinary members of the society in its affairs. In this part, one of the paragraphs would be
devoted for recapitulation and stressing of important points to which attention had been
drawn in the previous audit memo, but which have remained unattended to by the society.
In that case, a remark that the matter has been touched in the report may be made against
the relevant query in the audit memo. The Audit Rectification Report submitted by the
society should have been carefully gone through by the auditor, prior to the
commencements of his audit and the points reported to have been attended to or rectified
should be carefully scrutinized during the course of audit. Mention should be made only of
such points, which have not been attended to, or irregularities not rectified.
Part B of audit report shall generally include following items.
(a) remarks on scrutiny of Balance sheet and Profit and loss account.
(b) deficiencies in working of societies.
(c) activities undertaken beyond the object of society
(d) observation on meetings of AGM, BOD and committee meetings.
201
(e) remarks on growth or decline in deposit / capital / loan / profits etc. and important ratio
analysis.
(f) contravention of provisions of other allied Act like Stamp Act, Labour laws, Contract
Act, etc.
Format of Part B :-
The following are the major observations regarding the activity and
working of the society found during the audit.
requires reporting
1 remarks on 1) Paid up share capital - 1) Share capital – during the
scrutiny of Balances of paid up share audit, share capital amount
Balance sheet and capital of all members should has increased from Rs……
Profit and loss be tallied with balance as to Rs…… and number of
account. shown by balance sheet. The additional members
additional share capital issued admitted during the year is
and number of members …….. much.
admitted including number of 2) auditor shall state,
members resigned and share whether share linking to
capital refunded should be borrowing is observed by
mentioned in this section. society or not.
2) Reserves and funds 3) whether reserve fund is
3) Borrowing invested separately and that
4) Current liabilities investment is properly
5) Cash in hand and at bank marked as investment for
6) Investment Reserve Fund?
7) Fixed assets 4) whether borrowing
8) Current assets, loans and amount tallies with the
advances balance as shown by the
lending institute’s certificate
/ extract?
5) whether cash in hand is
verified by senior officers of
society and / or board of
directors by surprise check?
whether cash in hand and at
transit is fully insured ?
whether cash is maintained
continuously higher than
that required making loss of
interest to the society ?
6) whether investment
amount tally with the
balances as shown by
respective bankers /
F.D.receipts / CSGL
certificate ?
7) whether society has made
investment in mode which
are not permitted by Act and
202
Rules ?
8) whether society is holding
huge investment in stock ?
whether there is any
unsalable or slow moving
stock ?
9) whether there are any
debtors which are in arrears
for more than one year ?
whether society has taken
any legal action ?
2 deficiencies in Society is not undertaking all The auditor is required to
working of activities as specified in the comment whether the
societies. Byelaws and not complying society is undertaking the
with the principles and values activities as per the
of co-operatives. objectives for which it is set
up and all the principles of
co-operatives are observed.
3 activities If the society have undertaken The auditor should make a
undertaken any activities which are remark if the society has
beyond the object beyond the objectives the undertaken any activities
of society same should be reported. beyond its objectives.
4 observation on The auditor should go through The auditor should prepare a
meetings of the minutes of the AGM, list of meetings held and
AGM, BOD and SGM, BOD and committees. give suggestions for its
committee Important decisions taken in improvement.
meetings. such meetings whether
implemented or not should be
commented on. Whether the
meeting has been conducted
as per the provisions of the
Act, Rules and Byelaws ?
5 remarks on The societies should prepare The auditor should verify
growth or decline annual budget and get it whether the societies
in deposit / capital approve in the General functioning as per the
/ loan / profits etc. meetings. budget and if there is any
and important deviation, the same should
ratio analysis. be reported and necessary
corrective action should be
suggested.
6 contravention of It is possible that societies / The auditor is required to
provisions of banks do not execute their make a list of activities
other allied Act documents as per Maharashtra undertaken by the societies
like Stamp Act, Stamp Act, 1958 and such and applicable Act to them.
Labour laws, documents will not have Any contravention of such
Contract Act, etc. evidence value. Similarly the Act should be reported and
gratuity liability is not corrective action should be
provided in the books. The suggested.
various allied Act provisions
are not complied.
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(c) Part C :- This part deals with the account irregularities and suggestions of the auditors,
and the classification awarded by the auditor to the society.
Part C of audit report shall include following items.
(a) deficiencies in vouching, receipts, expenditure voucher.
(b) unauthorized / not sanctioned expenditure.
(c) expenditure which appears to be excessive to the auditor considering the size and
volume of society.
(d) general deficiencies observed in loan documents.
(e) travelling expenditure of Board of Directors and Staff members beyond their powers
and which appears to be excessive.
(f) receipt entries (credit entries) not supported by receipts.
(g) cash book, bank book, day book should be completed every day and signed by
responsible officers. If not, necessary remarks should be given in Part C.
(h) List of missing vouchers and loan bonds,
(i) List of vouchers on which payee’s acknowledgement is wanting.
(j) List of defective vouchers and loan bonds.
(k) List of payments which are not supported by documents such as bills or invoices, etc.,
or for which sub-vouchers are wanting.
(i) List payments, which are not properly authorized.
(j) List of items where delegated authority has been exceeded.
(k) List of remittances for which official receipts are not issued.
(l) Mistakes in interest calculations.
(m) Other irregularities to be specified.
X-4 QUALIFYING AUDIT REPORT:
12. Qualification in audit report: The Institute of Chartered Accountants of India has
issued a statement on the “Qualifications in the Audit Report” which states that,
1) Before making a qualified report, the auditor should carefully consider the
various aspect in their proper perspectives that when should qualify the report, where to
make qualification, how to qualify the report and effects of the qualifications.
2) Before qualifying the report, auditor should consider carefully the materiality
of the matter. It means that, if the materiality of the matter is negligible and meaningless
regarding the true and fair position of the financial statement, he should just express
disclaimer to it, instead of qualifying the report.
3) If the auditor finds that the items in the financial statement are misstated to
such extent that the statement does not give a true and fair view, he should express adverse
opinion.
4) All qualification should be contained in the auditor’s report itself and should
appear at one place in order to give the reader a clear view thereof.
5) The qualification are made in the auditor’s report should be such “ as not leave
any room for doubt in the minds of the public”. It means that the qualification should be
specific and not vague in nature. As the audit report of the Cooperative Societies is public
document, that is open to the General public also, which is not concern with the society, it
is very necessary to write the qualification in the specific manner. The qualification should
be clear and precise, and should give full information and not merely creates grounds for
suspicion.
6) The qualification should be preceded with the word “ subject to……” or
“except that….”.
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7) The auditor should state clearly whether in his opinion a particular mater stated
in his report is in the nature of a qualification or is merely an explanation.
8) The auditor should quantify wherever possible, the effect of the qualifications
on the financial statements in a clear and unambiguous manner.
9) The qualification may be stated in the long form report of the auditor
specifying the paragraphs in the Auditor’s report, (Auditors Certificate) where in the
qualifications are stated.
13.Examples of the qualifications: The qualifications as per the Cooperative Societies Act
are mainly related with the 1) True and fair view of the Financial Statements 2)
Maintenance of Books of Accounts and 3) The required information and explanations are
received or not.
1.True and fair view of the financial Statements: The true and fair view of the financial
statements means that they shows the correct view and there is no material changes
which effects there correctness. The materiality of the statements is defined by the
Institute of Chartered Accountant of India, which states that, “ items, the knowledge of
which might influence the decisions of the user of the financial statement”. Considering
the above, the examples are given herewith.
a) The Sugar factory, dealing his cane transport through the Cane transport society, shown
payable as transport charges to the worth Rs. 125 lakhs, after comparing the statements it
is found that they their no such amount payable to the transport society, as per records, this
is a material effect on the profit and loss account and balance sheet of the Sugar Factory,
hence the auditor has to qualify his report, stating that the profit and loss account is
incorrect to the tune of Rs.125 lakhs, and the balance sheet which show payable, there is
no such need to pay it. This has also effected the cane price of that year.
b)The Urban Bank has computerized branches more than 10, and they are fully
computerized. The computers value last year stood Rs. 100 lakhs, the bank was charging
depreciation on it, at the rate of 10and and now this year it has charged at the rate of 33%,
this will materially effect on the profit and balance sheet of the bank.
c)A Marketing society, having depreciation fund worth Rs. 100 lakhs and assets for which
it is created are of Rs. 200 lakhs, the society has diverted the depreciation fund by making
entry, crediting the reserve fund and debiting the depreciation fund for Rs. 50 lakhs, this is
a material effect on the profit and loss account, as the society has reduced the depreciation
fund, which was revenue reserve and added in reserve fund, which is a capital reserve.
This has not effected only this, but the society has diverting it increased its borrowing
capacity, and appreciated the value of assets also.
d)A marketing society, has no sales during the accounting year, however, the trading
account shows, profit in a reasonable manner. After investigation it is observed that the
society, has overvalued the stock, by increasing its values in schedules, the stock is
unsaleable, and no entry has been effected showing the increase in the cost, which has
resulted in gross profit to the society without any sales.
e)An urban has not provided the unsecured portion of the doubtful debts, resulting in
increase of profit, and distribution of dividend, which is not liable.
f)The spinning mill has purchased cotton from the traders, at the close of the year on
credit, has not passed the entry for payable, and also not included in the stock.
g)Expenditures, which are payable by the society are not provided for.
h)Sales effected on credit is not recorded, and included in the stock of a marketing society.
i)The urban credit society, urban bank, and seva societies have not provided the overdue
interest and have taken it to the income, resulting into increase of the profit.
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j)Charity fund is created by the society, by debiting to the profit and loss account, though
the society’ byelaws and act provides to appropriate it from the net profits. And the society
has paid from it donation to the charity purposes.
k)The sugar factory has sold the assets, while accounting the factory has not considered
accumulated depreciation charged till the date of sale, which was credited to the
depreciation fund.
l)The spinning mill has replaced its machinery however it has not made any accounting
entry for the sale of the same, considering scrap value.
m)The sugar factory has replaced its boiler tubes, expending much amount, and has
capitalized the same instead of charging it to the deferred revenue account, as the tubes
does not increased the capacity or efficiency of the boiler.
n)The Urban bank has not provided the depreciation in the value of its investments.
o)The industrial society has repaid its share capital at the face value, however the book
value shows erosion in the value of share, which is required to be paid as per the Act.
p)The seva sahakari society has valued its closing stock at selling price, instead of cost or
markets whichever is less, as per consisting policy.
q)The urban credit society has given loan to the sugar factory, but has shown as deposit,
without obtaining any security.
r)The District central bank has not provided for cadre fund as required by the act.
s)The marketing society has shown goods on consignment, as its own, without passing the
entry for sundry creditors.
15.Example of the transactions involving infringement of the provisions of the Act, the
Rules and the byelaws: Few examples of the transactions involving infringement of
provisions of the Act, the Rules and the byelaws are illustrated below, the auditor are
required to study, the byelaws of the society and accordingly mention the details of
infringements in his audit report.
1) A society has disbursed a loan outside the area of operation as per byelaws of
the society.
2) A society has refunded shares to the members, who have resigned, at the face
value, however as per the last audit report the valuation of shares is less than the face
value. Society has not adhered to the provisions of rule 23 of the M.S.C. Rules 1961.
3) An urban bank, urban credit society, and district central bank has disbursed
loan, in excess of limits fixed in the byelaws and guidelines given by the Reserve Bank
and Nabard and Rule 43(2).
4) A society has issued preferential shares to Government without amending its
byelaws.
5) The society has given membership to the members without crediting, at least,
value of a one share as per byelaws.
6) Society has not taken share transfer fees for the transfer of shares as per
byelaws.
7) The society has exceeded the borrowing capacity as per byelaws and sections
43 and rule 35.
8) The society has charged interest more than the amount of principle, breaching
the provisions of section 44 A.
9) The society is not required to accept deposits from the non-member as per
byelaws and section 45 of the Act, however the society has accepted the same.
10) The society has disbursed the dividend in excess of the limit prescribed in
section 67 of the Act.
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11) The society has created funds by charging the profit and loss account instead of
creating them by appropriation as per section 65 and rule 49 A.
12) The society has not appropriated 25 % of the net profit towards reserve fund as
per section 66 of the Act, or has not obtained permission from the registrar to transfer less
than 25% of net profits to reserve fund.
13) The society has not provided for the education fund as per the provision of the
section 24 A and rule 20 B.
14) The urban bank and District Central bank has not invested its funds as per
directives of the Reserve Bank of India and Nabard for SLR/CRR purposes violating the
Banking regulation Act, section 18 and 24.
15) The society has not invested funds as per modes given in Section 70 of the Act.
16) The society has not invested its provident fund separately as per provisions of
the section 71 and rule 56 of the Act.
17) The society has used its funds for personal use as per section 71 A of the Act.
18) The member of the board of director of the society has defaulted the dues,
however he is continuing as a member of board violating the provisions of the section 73
CA
19) The annual General meeting has changed the rate of dividend recommended by
the board of directors as per Section 75 and Rule.
20) The liquidator has not disposed the surplus assets as per provisions of the
section 110 of the Act, in respect of the liquidation society.
21) The promoters of the newly registered society have not credited the amount in
district central bank, so far collected by them for registration of the society as per Act.
22) Society has given traveling allowances, sitting fees, and daily allowances in
violation of the section 160 B and Rule 107 A of the Act.
23) The urban credit society has not maintained liquid resources as provided in the
rule 41 of the Rules.
24) The society has not adhered to the conditions laid in rule 42 for granting the
loan.
25) The member of the society have not hold the shares in proportionate to the loan
sanction by the society, as per rule 43 (1) of the Rules.
26) Society has borrowed from the non-member in violation of the Rule 46 A.
27) Society has made credit sales violating the provisions of the Rule 46 B.
28) The society has written off the bad debts without following the procedure laid
down in the Rule 49 of the Rules.
29) The society has not charged the profit and loss account, expenses required to
be charged to it, as per Rule 49 A.
30) The society has maintained cash in excess of limits prescribed by the rule 107
C.
31) The monetary violations of the bylaw provisions are required to be studied by
the auditor and mention them in his audit report.
32) The society has paid dividend out of capital funds, as there is no net profit to
distribute.
IX-5 Drafting of General Remarks :-
It is necessary that the general remarks should be divided into several paragraphs
consecutively numbered, with a clear-cut heading for each paragraph. In order to avoid a
vague narrative, each paragraph should begin with a suggestive headline e.g. laxity in
collection of overdues, inadequacy of the arrangements for internal control etc.
207
Some of the auditors merely point out accountancy irregularities. It is necessary

that very serious irregularities that exists in the working of the society should be brought
out in the audit memo. The points to be referred to in the audit memoranda of different
types of societies will be different according to the nature of their operations and the
business methods adopted by them. In case of most of the societies, the following should
form the subject matter of separate paragraphs.
(1) Points in the last audit memo. Not attended to by the society.
(2) Review of progress briefly indicating its achievement and present position.
(3) Deficiencies and defects to the arrangements for internal control and suggestions
for their improvement.
(4) Management Loan policy (in case of central and Urban and other credit societies)
mode of conducting business, employment of funds, overtrading, if noticed, etc.
(5) Financial position, distribution of assets, adequacy of working capital, proportion
of owned funds to borrowed funds, maintenance of adequate fluid resources.
(6) Breaches of the provisions of the Act, Rules and byelaws of the society, non-
observance of the business rules and instructions issued by the Registrar and the federal
society.
(7) Correctness or otherwise of the balance sheet and the profit and loss account. Brief
comments or explanatory notes on only such of the items of assets and liabilities, which
call for specific mention, should be given. It is not necessary to comment on each and
every item of the balance sheet. Only where the auditor feels that remarks are called for or
clarification on explanation is necessary in respect of any item, comment should be made.
(8) Disagreement of bank balances, differences in the agreement of personal ledger
balances, stock accounts, etc., where these are noticed, the audit certificate should be
properly qualified.
(9) Regularity of the meetings held and procedure followed. Resolutions passed or
decisions taken, which may not be in the interest of the society or of the members in
general.
(10) Loyalty of members and efficiency of management, operational efficiency of the
various activities undertaken by the society in particular, working of sales depots,
processing units, products etc. according to norms or standard laid down.
(11) Cases involving misapplication or misappropriation of the funds of the society,
frauds etc.
(12) Proper maintenance and use of vehicles, telephones and other moveable and
immovable property of the society.
(13) Proper safeguarding and insurance of all property held by the society.
(14) Adequate provisions for depreciation of all wasting assets.
(15) The auditor showing the operational efficiency of the various activities undertaken
by the society may work out various ratios.
(16) Classification awarded during the year under audit.
(17) observations of the auditor regarding the affairs of the society. The auditor has to
see that the society is working on sound business lines and according to co-operative
principles and the office-bearers are aware of their responsibilities and attend to their
duties properly.
(18) the accounts of which he has audited.
(19) the irregularities noticed by him.
(20) his suggestions for improvement. The suggestions made should be such as can be
implemented without much difficulty and without involving the society into undue financial
commitments or administrative inconvenience.
(21) The general remarks should be drafted with due regard to brevity and preciseness.
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(22) The general remarks of the auditor should be concise and to the point.
(23) the drafting of the general remarks should be so planned as to embrace all-
important aspects of the working of the society and defects noticed during the course of
audit.
22. Draft Audit Report to be discussed with the management before final report is
submitted :- The auditor should prepare the draft audit report and discuss with the
management. The Registrar under his circular No. ADT/552, dated 19-5-1966 has issued
instructions that auditors should invariably discuss their draft audit reports in the meeting
of the Board of Directors or Managing Committee of the society, before finalizing it.
Some of the auditors merely discuss the draft audit report with the chairman, Secretary or
other office-bearers of the society. Sometimes the draft audit memo is merely handed over
to the Secretary or the Accountant for perusal and comments. This is not sufficient. The
important points of the draft audit memo should be discussed at a meeting of the Board of
Directors of the committee specially called for the purpose, if necessary. The auditor
should attend this meeting and explain the points raised by him. The fact that the auditor
attended the meeting of the Board or the Committee and discussed the draft of his audit
memo with the members present should be recorded in the proceedings of the meeting.
IX-6 AUDIT CLASSIFICATION OF CO-OPERATIVE SOCIETIES
23.Introductory. - At the conclusion of his audit, the auditor is required to award an audit
classification to the society. The auditors put all societies in one or other or the following
classes.
Audit classification Remarks
A Excellent
B Satisfactory
C Poor
D Very bad
The audit class is based on certain recognized principles, which the auditor is
required to follow. The various points to be considered while awarding audit classification
to agricultural credit societies, central and urban banks, land development banks,
consumers societies, marketing societies, forest labourers societies, sugar factories,
spinning mills, etc. have been explained in a number of circulars issued by the Registrar.
A system of awarding marks according to the extent of fulfillment of various criteria has
also been laid down in respect of certain types of societies and classification has to be
awarded on the basis of total marks secured by the society.
It would thus, be seen that audit classification is awarded according to well
recognized principles and auditors enjoy little discretion in the matter of awarding audit
classification. Audit is the only method by which Government and the public can judge the
position and achievements of the society and the audit class indicates the degree of
success in achieving the objects for which the society has been organized and also its
present position. Societies, which are awarded a high audit classification year after year,
enjoy considerable public confidence and are in a position to raise funds required by them
in comparatively easier manner. Audit must be conducted according to established
audit practices and the instructions issued by the Registrar and the audit
classification awarded after a careful examination of the extent of fulfillment of the
various criteria prescribed for the purpose, since a wrong classification will not only
209
affect the working of the society and its credit, but will also mislead members and
creditors of the society and also the general public as well as the wrong audit classification
at higher side also mislead the creditors, depositors, members and Government.
The Registrar has issued a number of circulars laying down definite criteria, which
have to be considered by auditors while awarding audit classification. Different criteria are
grouped under suitable heads and a system of awarding marks according to the extent of
their fulfillment has been prescribed by the Registrar. Audit classification to the society
has to be based on the total marks secured by it. A statement showing the different criteria
prescribed by the Registrar for the type to which the society belongs and the marks allotted
under each head and sub-head, has to be prepared by the auditor to enable him to
determine in what audit class the society should be placed. The statement showing the
marks allotted under each head referred to above may be shown to the office-bearers of the
society if they desire to see it. The Registrar in his circular No. ADM/243, dated 6-12-
1955, has directed that in order to enable the society to know why the particular audit
class has been awarded to the society, the auditor should devote a separate paragraph in
his general remarks to be appended to the audit memo, the considerations in view of
which the particular audit classification has been awarded to the society. Where a
system of awarding marks has been prescribed, the auditor should use his discretion as to
the extent of fulfillment of the various criteria and be rather liberal in awarding marks, as
restrictions have been laid down for awarding maximum marks under particular heads.
So far, the Registrar has laid down specific criteria and maximum marks under each
criteria, for the purpose of determining the classification to be awarded in case of the
following types of the societies: -
(i) Agricultural credit, multi-purpose and service societies. (Registrar’s circular
No.).
(ii) Marketing societies. (Registrar’s circular No. ADT/298/AC dated 23-7-1970).
(iii) Consumers societies. (Registrar’s Circular No. ADT/298/AC, dated 23-7-1970)
(iv) Forest labourers societies. (Registrar’s Circular No. ADT/298/AC, dated 15-2-
1969)
(v) Co-operative Sugar Factories. (Registrar’s Circular No. ADT/29/AC, (CSF),
dated 10-8-1966
(vi) Co-operative spinning mills. (Registrar’s circular No. ADT/298/AC dated 30-4-
1970).
(vii) Apex and primary land development banks. (Registrar’ circulars No.
ADT/298/AC, (LDB), dated 15-6-1964 and No. ADT (AC) (LDB) dated 31-8-1967).
(viii) District Central Cooperative Bank (Registrar circulars No.)
(ix) Urban Cooperative Banks (Registrar Circular No. )
(x) Urban Credit Societies. (Registrar Circular No. )
(xi) Salary Earners cooperative Societies (Registrar Circular No. )
Sr. Type of society to which it is Circular issued by the Registrar / Nabard

No. applicable.
1 District Central Cooperative Banks NB.Dos.HO.POL / 1830 /J.1/ 2003.04
(Circular 58/ DoS.3/ 2004 dated 1st March
2004
2 Land Development Banks (Now ADT/298/AC, (LDB), dated 15-6-1964
Agriculture and Rural Development and No. ADT (AC) (LDB) dated 31-8-
Bank) 1967
3 Agricultural and credit societies,
multi purpose societies, seva sahakari
210
sanstha.
4 Urban Cooperative Banks
5 Salary Earners Societies
6 Agricultural Sale Purchase Society
7 Sugar Factories ADT/29/AC, (CSF), dated 10-8-1966
8 Industrial Sangh and Weavers
Societies
9 Spinning Mill ADT/298/AC dated 30-4-1970
10 Dairy Societies
11 Dairy Union
12 Fisheries Societies
13 Poultry Societies
14 Consumers Stores and Societies ADT/298/AC, dated 23-7-1970
15 Housing Societies
16 Marketing societies ADT/298/AC dated 23-7-1970
17 Forest labour societies ADT/298/AC, dated 15-2-1969
24.Broad principles, - From the above table, it can be understood the audit classification is
awarded based on the working of the society. There are other societies, where the
Registrar has not issued circular but the auditor has to give the audit classification. The
broad principles for awarding audit classification to different types of societies, where
specific instructions have not been issued, are as under: -
(i) Co-operative vitality. – Following area to be considered at the time of checking the co-
operative vitality and all these added together indicate the co-operative vitality of the
society.
(a) The extent of the interest manifested by the members in the working of the society as
judged by their attendance and the extent of intelligent participation in the general
meetings.
(b) The proper selection of the office-bearers.
(c) The outlook of the members of the committee as can be seen by the strict observance
of the bye-laws, Act and Rules
(d) the efforts made by them to interest the ordinary members in the economic activities,
(e) Administrative set-up and co-operative ideals of the society and the extent to which
these efforts have borne fruits as indicated by the loyalty of the members to the society:
(f) Punctuality in the repayment of their dues and discharge of other liabilities undertaken
by them such as pooling and joint sale of produce in case of marketing societies,
(g) participation in the production programs of the society in case of industrial societies
purchasing their requirements from the co-operative stores, etc. and
(h) Member willingness to allow their entire economic life to be molded by the society;.
Joint efforts for bringing about improvement in living conditions of the weaker section of
the community by increasing productivity of their labour, provision of resources required
by them, increasing their employment opportunities and saving them from being exploited
by the economically stronger section of the community active participation in community
development activities are also important consideration.
(ii) Administrative Efficiency. - This is judged by the degree of efficiency attained in the
day-to-day working of the society, due observance of co-operative principles and sound
canons of business and financial propriety in the conduct of business and the sum total of
the results achieved by the society in relation to the maximum which the society is
intended or is capable of achieving both from the business and the co-operative stand
points. In other words, the extant to which the society has been able to cater to the various
211
needs of its members and the manner in which its affairs are being conducted, should
determine the administrative efficiency of the society. The committee should meet
regularly at least once a month and discuss ways and means to develop the business of the
society. The general meetings should also be well attended and all important policy
decisions should have been taken after careful consideration.
(iii) Operational Efficiency. - This will depend upon adoption of sound purchase policy
and maintenance of all stocks at satisfactory levels, preparation of financial budgets and
adoption of budgeting system for purchases and sales and costs, avoidance of wastage and
effecting economy in costs, full utilization of available resources and manpower and of
installed capacity by working multiple shifts, adoption of measures for increasing
productivity of labour, prompt and efficient service to members and other customers.
Profit earned is only one of the criteria for judging operational efficiency.
(iv) Financial stability. - The following features determine the adequacy of the capital
structure and soundness of the financial conditions of the society.
(1) The adequacy of the owned resources of the society in relation to its total needs and its
capacity to raise funds to meet the financial requirements of its members;
(2) Proper balance between its own funds and its borrowings and satisfactory increase in
own funds;
(1) Proper distribution of its assets as may be appropriate for the type of activity
undertaken by the society and standard prescribed by the Registrar and finally.
(2) The precautionary and other measures taken and the policy in working adopted to
ensure strict fulfillment of the legal, social, financial and other obligations by the society
to its members, creditors and other customers and to the society by its members and other
debtors.
(v) Staff. - Unless a society has adequate, competent, properly qualified and trained staff
employed under satisfactory conditions and adequately remunerated, it will not be able to
discharge its functions satisfactorily.
(vi).Internal control. - A satisfactory system of internal control is the sine-qua-non of
successful management. The following are the essential features of a sound system of
internal control.
(1) Proper delegation of authority and distribution of work and responsibility amongst the
officers and the different members of the staff so as to ensure that the work of each
employee is checked by another and no individual howsoever highly placed has the sole
responsibility for all the phases of a transaction.
(2) Provision of checks and balances at every accounting point to prevent collusion and
also to ensure prompt detection of frauds and errors.
(3) Unambiguous fixation of duties and responsibilities of each employee and proper
supervision over all these arrangements to ensure smooth and efficient working.
(4) Satisfactory arrangements for safeguarding of the cash, securities, stock in trade and
other property of the society.
(5) Maintenance of up-to-date accounts and records and arrangements for internal audit.
(vii) Accounts and Records. - Correct and up-to-date maintenance of account books and
records and availability at all times of any financial or statistical information that may be
required, correct and up-to-date posting of ledgers, prompt preparation of
monthly/quarterly statements of accounts and reports for consideration at Board meetings,
maintenance of cost accounts.
(viii)Rectification of audit objections. - Action taken to remedy the defects pointed out by
the Auditor and punctual submission of the audit rectification reports, is also an important
consideration.
212
(ix)Overdues. - Punctual repayment of the dues any the members and prompt recovery of
other debts due to the society. Prompts and adequate action to recover all dues and
overdues and precautions taken to arrest the growth of overdues.
The above are the more important of the general considerations which applicable for all
types of societies. However, certain special criteria have to be taken into consideration
while awarding audit classification to different types of societies having due regard to the
nature of business conducted by them and the special features of their working.
26. Special instructions for certain type of societies. -The Registrar has also issued
general instructions for awarding audit classification of urban banks and non-agricultural
credit societies under Registrar’s circular No. ADM-6-20, dated 26-11-1957. Under
Circular No. M.F./Audit dated 30-10-1956, the Joint Registrar for Industrial Co-operation
and Village industries, Poona, has laid down a criteria for granting audit classification to
industrial co-operatives.
The Nabard in its circular No.NB.Dos.HO.POL / 1830 /J.1/ 2003.04 (Circular 58/
DoS.3/ 2004 dated 1st March 2004 has laid down criteria for awarding audit
classification to District Central Co-operative Banks, the same is made applicable by the
Registrar vide his letter No. ANI/ LEP/ JIMSABANK Vargvari/ 782/ 2004 dated 21st
July2004 . These are being followed while awarding audit classification to District Central
Co-operative Banks in this State.
27. Appeals against audit classification awarded by auditor. -Although audit

classification has to be awarded on consideration of a number of factors and definite
criteria, which have been laid down by the Registrar, are required to be taken into
consideration, it is possible that some of the societies may feel that they deserve a higher
audit classification. Such societies may appeal to the Registrar for raising the audit class
awarded to them by the auditor, stating the grounds, which justify award of a higher audit
class. The appeal for audit classification is heard by the Registrar as per section 154 of the
M.C.S. Act. The Registrar may also raise the audit class if he is satisfied that the society
deserved a higher audit class and communicate his decision to the society and the
Registrar.
IX-7. SPECIAL REPORTS.
A) For administrative Actions.
29. Circumstances in which Special Reports must be submitted. -A special report should
be submitted in respect of the following matters: -
(A) Cases in which important provisions of the Act, Rules or bye-laws of the society
have been infringed, such as failure to hold annual general meeting in time, irregularities
in the election or appointment of officer-bearers, failure to hold committee meetings
regularly, transaction of business without quorum, etc.
(B) Activities undertaken which are not convergent with the byelaws, investment of
funds against the provisions of section 70 or in business not permitted by the byelaws.
(C) Cases in which office-bearers have entered into transactions, which have brought
loss to the society and cases in which they have taken advantage of fluctuations in markets
and have benefited themselves, or occasioned, unwarranted losses to the society.
(D) Imprudent and irregular advances of loans and cash credits, Benami loans, loans
against inadequate or non-existing security, disproportionate loans to members of the
committee and their relatives or certain influential members, etc.
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(E) Advances taken by the officers not accounted for or subsequently refunded in cash
or debited to account. Temporary misappropriation of cash or other property of the
society.
(F) Infructuous or objectionable expenditure, expenditure disproportionate to the
financial position of the society or the importance of the occasion.
There would also be many other matters, which the auditor may desire to bring to the
special notice of the administrative officers. In all such cases, the auditor should submit a
special report.
30.Instructions for preparation of Special Reports. -While submitting a special report,

the auditor is required to pay attention of certain vital matters. In the first place, he should
satisfy himself that circumstances exist which warrant submission of a special report or
that there are matters which he considers important. His special reports should,
therefore, be restricted to important matters on which some administrative action is
called for. Unimportant matters need not be reported. Secondly, the auditor should have
conducted thorough investigation and collected sufficient evidence to make out cases
for civil or criminal liability to be fixed on the culprits. Mere mention of suspicious
circumstances without collecting necessary evidence to prove the guilt will not be
sufficient. If the auditor is unable to carry out a though and complete investigation
himself, he should explain the circumstances and suggest ordering of an inquiry. But
before enquiry is suggested, the Auditor should make thorough enquiries and collect
relevant evidence himself. He must exercise powers given to him under the Act and Rules
only cases where it is impossible for him to investigate the matter and collect covered by
audit, evidence to be collected by visiting distant places, etc., he should recommended
enquiry.
SPECIFIC REPORTS
B-For Criminal Actions.
31. Circumstances in which specific report is required: Indian Penal code (Offences)
The following are the offences which auditors of co-operative societies generally come
across during the course of their audit: -
Sr.no. Nature of offence IPC section Instances / explanation Draft audit remarks
1 Theft 378 Theft of valuables During the audit, we
belonging to society by observed that the
outsiders where FIR is stock / cash /
not lodged by the valuable of society
society for Rs…… has been
stolen. But the
society has not filed
any FIR.
2 Theft by clerk or 381 Theft of valuables During the audit, we
servant of belonging to society by observed that the
property in employee or any stock / cash /
possession of directors of society valuable of society
master whether FIR has been for Rs…… has been
lodged or not lodged stolen by the
following
employees /
directors by using
the …….. modus
214
operandi. But the

society has filed
FIR on …… date
and investigation is
on. / the society has
not filed any FIR.
3 misappropriation 403 1) Debiting excess During the period
– amount than the under audit
misappropriation voucher amount / bill misappropriation of
as dishonest amount. Rs.------ is detected.
appropriation or 2) Withdrawing the The said
conversion for a amount from bank but misappropriation
person’s own use not crediting in cash has been committed
of property book by using ---------
belonging to 3) Debiting the bank modus operandi
another. It also account without (without security /
covers subsequent depositing the amount fabricated
wrongful or in bank documents / false
fraudulent 4) disbursing loans security, etc.). The
retention of without sanction / following persons
property . without security / are responsible for
without loan documents misappropriation.
/ using forge documents 1….
5) any other transaction 2…
with the intention to 3…
defraud the society by
any person.
4 Criminal breach 405 1) The cashier who is During the period
of Trust - entrusted the custody of under audit, we
whoever, being in cash, misappropriates have detected that,
any manner the cash. the cashier has
entrusted with 2) The go-down keeper misappropriated
property, or with who is entrusted with cash of Rs…….
any dominion the stock / inventory of
over property, society,
dishonestly misappropriates the
misappropriates same.
or converts to his
own use that
property, or
dishonestly uses
or dispossess of
that property in
violation of any
direction of law
prescribing the
mode in which
such trust is to
be discharged, or
of any legal
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contract, express
or imply, which
he has made
touching the
discharge of such
trust, or willfully
suffer any other
person so to do,
commits
“criminal breach
of trust
5 Criminal breach 408
of trust by clerk
or servant -
6 Criminal breach 409
of trust by public
servants, bankers,
by merchant or
agent etc
7 Cheating 415
8 Cheating by 416
personation
9 Cheating with
knowledge that
wrongful loss
may ensure to
person whose
interest offender
is bound to
protect
10 Cheating and 420
dishonestly
inducing delivery
of property
11 Dishonest or 424
fraudulent
removal and
concealment of
property
12 Use of forged 471
document or
electronic record
as genuine
13 Forged document 470
or electronic
record
14 Forgery 463
15 Making a false 464
document
16 Forgery of 467
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valuable security-
will etc.
17 Forgery for 468
purpose of
cheating
18 Forged document 470
19 Falsification of 477-A
accounts
32.Criminal misappropriation- the offence most commonly met with in co-operative

societies is the misappropriation of its funds. Section 403 defines “misappropriation as
dishonest appropriation or conversion for a person’s own use of property belonging to
another. It also covers subsequent wrongful or fraudulent retention of property though
innocently come by. The dishonest intention to appropriate the property of another is
common both in theft and misappropriation.
33.Misapplication and misappropriation distinguished. -Where the funds of a society

have been misapplied, but there was no intention to derive any personal benefit, the
misapplication of the money, though illegal will not amount to misappropriation and
hence no criminal action will lie against the wrong-doers, even though loss has been
occasioned to the society. Thus, for example, when loans have been advanced in excess of
the limits specified in the byelaws or loans have been made to non-members or against
inadequate security, no offence is committed. The remedy in such cases is to invoke the
provisions of section (88) and not institute criminal proceedings. Similarly, when
transactions have been entered into in a negligent manner or against the provisions of the
Act, Rules or the byelaws of the society, the remedy is to institute proceedings under
section (88) and claim damages.
A person can be held liable for criminal misappropriation, only if he
dishonestly misappropriates or converts for his own use, money, goods or other
moveable property, which has come into his possession. As in the case of theft,
dishonest intention to appropriate illegally is the basis for institution of criminal
proceedings. To sustain a charge of misappropriations, therefore the prosecutions has to
prove that the accused deprived the complainant of his property and wrongfully
misappropriated it or retained it with dishonest intention. However, mere retention of
money would not warrant a conviction unless there is evidence to prove that the accused
used or retained the money dishonestly.
It is, no doubt, impossible for the prosecution to follow the money in the hands of
the accused person and to prove that he spent certain specific amount in any particular
manner. The prosecution must stop when it is proved that the accused has received the
money, has acknowledged the receipt of the money and has failed to pay it to his master or
show it in his master’s account. Where it is the duty of the accused to pay the moneys
received by him, this non-payment is prima facie evidence that he has wrongly
appropriated them for himself. Non-payment coupled with false account either as to the
receipt of the money or its disposal is conclusive evidence.
On a charge of misappropriation, it is sufficient for the prosecution to prove that
some of the money mentioned in the charge has been misappropriated by the accused even
though it may be uncertain as to what is the exact amount so misappropriated. Evidence
has accordingly to be led that the accused retained, misappropriated or converted for his
own use, money, goods or other property of the society and that he did so dishonestly.
Evidence may have to be led to establish that the accused received the money, but did not
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credit the amount in his cashbook or pay it over to his society and was in financial
difficulties at the time.
The mere fact that the accused was given time to make up his account and pay the
balance due, does not vitiate a conviction for criminal misappropriation or show that the
matter is one for a Civil Court only.
Separate offences. -Misappropriation of separate items of money on different dates
constitutes distinct items and the facts connected with each items should be subject matter
of separate inquiry.
Where moneys are dishonestly misappropriated and false accounts or vouchers are
prepared for the purpose of screening the misappropriation, the offence of falsification
becomes part and parcel of the offence of misappropriation and the whole transaction
must be practically considered as one offence consisting of criminal misappropriation
according to the Mumbai High Court.
34.Criminal breach of trust. -Section 405 defines criminal breach of trust and section 406
prescribes punishment for criminal breach of trust. Under section 407, criminal breach of
trust by carriers, wharfingers, warehouse keeper, etc., who have been entrusted with goods
for transport or for other purposes is punishable with seven years’ imprisonment and/or
fine. Section 408 deals with criminal breach of trust by clerk or servant, while section 409
groups’ together public servants, bankers, merchants, factors, brokers, attorneys and
agents for purposes of prescribing higher punishment of ten years.
Section 405 defines criminal breach of trust as, whoever, being in any manner
entrusted with property, or with any dominion over property, dishonestly
misappropriates or converts to his own use that property, or dishonestly uses or
dispossess of that property in violation of any direction of law prescribing the mode in
which such trust is to be discharged, or of any legal contract, express or imply, which
he has made touching the discharge of such trust, or willfully suffer any other person
so to do, commits “criminal breach of trust”
To constitute the offence of criminal breach of trust, there must be dishonest
misappropriation by person in whom confidence is placed as to the custody or
management of the funds or property, in respect of which the breach of trust is alleged.
There must be an entrustment; there must be misappropriation or conversion to one’s
own use or use in violation of any legal direction or of any legal contract and thirdly,
the misappropriation or conversion or use must be with a dishonest intention.
Trust: Section 3 of the Indian Trust Act, 1882, defines trust an obligation annexed to the
ownership of property and arising out of a confidence reposed in and accepted by the
owner or declared and accepted by him for the benefit of another or of another and the
owner.
The word trust is comprehensive expression and has been used in section 405 as
covering not only the relationship of trustee and beneficiary but also that of bailer and
bailee, master and servant, pledger and pledgee and all other relation which postulate the
existence of a fiduciary relationship between the complainant and the accused. ( J.R.D.
Tata Chairman T.I. and S. Co. ltd. V. Payal kumar, 1987) Directors of a Company are not
only agents but they are in some sense to some extent trustees or in the position of
trustees. ( R.K. Dalmiya v. DelhI Administration.(AIR 1962)
35.Criminal misappropriation and criminal breach of trust distinguished. -In a criminal

misappropriation, the property comes into the offender by some causality or otherwise and
he afterwards misappropriates it. In the case of criminal breach of trust, the offender is
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lawfully entrusted with the property and he dishonestly misappropriates the same of
willfully suffers any other so to instead of discharging the trust attached to it.
36.Misfeasance, misappropriation and breach of trust distinguished. - Every breach of

trust gives rise to a suit for damages, but it is only when there is evidence of a mental Act,
or intention of fraudulent misappropriation that the commission of any embezzlement of
money becomes a penal offence punishable as a criminal breach of trust. Every offence of
a criminal breach of trust involves a Civil Court, but every breach of trust in the mens rea
(mental Act, or indention of fraudulent misappropriation), cannot justify a criminal
prosecution.
The terms of the section are very wide. It applies to one who is in any manner
entrusted with property or dominion over property and provides inter alias that if such a
person dishonestly misappropriates or converts to his own use, the property entrusted to
him, he commits criminal breach of trust. This part of the definition is complete in it self
and has no reference to the provisions as to disposal in violation of a directive of law or of
a legal contract. A necessary element of criminal breach of trust is that there should be
entrustment of property to the accused. The entrustment may be in any manner.
Section 405 embraces the cases of all offences, which are not covered by sections 407, 408
and 409. Offences committed by trustees with regard to trust property and of directors of
companies and committee members of co-operative societies, who do not come within
the purview of section 408, are covered by this section.
37.Dishonest Intention: To establish a charge of criminal breach of trust, the prosecution

is not obliged to prove the precise mode of conversion, misappropriation or misapplication
by the accused of the property entrusted to him or over which he had dominion, where the
entrustment of money is admitted or proved. The principal ingredient of the offence being
dishonest misappropriation or conversion which may not ordinarily be a matter of direct
proof, entrustment of property and failure in breach of an obligation to account for the
property entrusted, if proved, may, in the light of other circumstances, justifiably lead to
an inference of dishonest misappropriation or conversion. Where the accused is unable or
fails to account for the money or property received by him or interested to him or renders
an explanation of his failure to account, which is untrue, an inference of misappropriation
with dishonest intention may readily be made.
Dishonest intention is a necessary element for criminal offence under Section 406.
Subsequent conduct in repudiating the transaction during the trial has no hearing on
dishonest intention at the time of the alleged transaction (Kaushalya V. State AIR 1964)
IN case of criminal breach of trust, failure to account for the money proved to have been
received by the accused or giving a false account as to its use is generally considered to be
a strong circumstance against the accused. This however, is a piece of evidence pointing to
dishonest intention and is not conclusive. (Puran Chandra v. State AIR 1966) Mental act
of fraudulent misappropriation is the essential ingredient of the offence f criminal breach
of trust, the prosecution must prove the existence of the dishonest intention beyond
reasonable doubt, it will not suffice for the prosecution merely to prove the circumstances
which may be consistent either with the dishonest intention of the accused or the absence
of such intention. Dishonest intention cannot be directly proved and has to be inferred
from the conduct of the accused both before and after the date of alleged entrustment.
Mere difficulty in proving is no excuse. ( Amrutlal v. Bajaranglal, 1963 CR.L.J.)
38.Entrustment:The word “entrustment” when used in respect of money means that the
money has been transferred to the accused under circumstances which show that
219
notwithstanding its delivery to be accepted, the property in it continues to vest in the

prosecutor and the money remains in the possession or control of the accused as a bailer
and in trust for the prosecutor as bailer, to be restored to him or applied in accordance with
his instructions. The terms of this section are wide enough to include trustees of every
kind, i.e. those who are employed and receive remuneration for acting as trustees, but also
by reason of some trust constituted by express deed or even by implication of law, though
the office (as in the case of membership of committees of co-operative societies) may be
gratuitous and they may not be receiving any remuneration for the services rendered by
them.
If there is no trust, there can be no offence under the section. Thus, a person who
takes a sum of money by way of loan is not entrusted with the property. However, where
an officer of the society having custody of the cash balance retains large sums of money
for considerable period and subsequently enters them as an advance or loan taken by him,
he commits criminal breach of trust. Similarly, when a servant receives large of sums of
money, which he has obtained from his employer on the false pretext that they were
required to pay wages, it was held that he was guilty of criminal breach of trust although
the criminal intent to misappropriate was present at the time of receipt of the money by
him.
Where a public servant entrusted with money for purchasing certain articles,
purchases the articles, he done not commit any offence under section 406 merely because
he does not produce the supporting vouchers along with the bills for the purchase of the
articles. ( State of H.P. v Nandlal 1983 Cr. L.J.). Where accused person not legally entitled
to carry on banking business. Fail to repay the amount deposited with them by the
members of the public; they are guilty of the offence of criminal breach of trust.
(A.G.Abhidham v. State of Kerala 1987 Cr. L.J.). Where the Secretary of a Society was
dealing with the cash and did not make over the cash to the President of the Society while
handing over the charge of the post, he was held guilty of misappropriating the amount
and convicted under section 406 ( Uday Narayan Panda v. State 1978 Cr. L.J.) Where
entrustment of the property is proved, burden lies on the accused to account for the
money/property, burden does not lie on the prosecution to prove how the accused
misappropriated the property. ( Uday Narayn Panda v. State 1978 Cr. L.J.)
The word ‘ entrusted’ itself conveys and includes that the person handing over the
property must have confidence in the person taking the property so as to create a fiduciary
relationship as between them. If the property is obtained by trick or by any other unlawful
means, then there cannot be any entrustment. ‘Entrustment ‘ means the handing over of
the property by lawful means. Where the property is acquired by trick or ‘ in any other
manner’ by false representation to the owner thereof offence under Section 420 is
committed. Where the goods were pledged by the complainant debtor with the accused
creditor as security for payment of the debt and the agreement further provided that if the
debt was not paid within the stipulated period with the 15 days clear notice, and accused
disposed of the goods pledged without notice to the debtor, the accused was held guilty of
the offence of criminal breach of trust. (Jaswantrai Maniclal Akhney v. state of Bombay,
AIT 1956)
39.Property: As regards the meaning of the term “property”, it has been held that it
includes the sale proceeds of the goods entrusted to the accused and also goods purchased
with the moneys provided by the employer and entrusted to the accused for making the
purchases.
The property in the section 405 includes the property, purchased with the money
entrusted in view of the words “ in any manner” occurring in Section 405. The offence of
220
criminal breach of trust cannot be committed in respect of one’s own property; the
property must belong to another person. The worked property is not restricted to movable
property; the funds of a company do amount to property within the meaning of section
405. The section does not contemplate that the property in respect of which the offence of
criminal breach of trust is committed must belong to the complainant.
40.Dominion over property-The accused hypothecated to the complainant under a written

contract, all his claims against Government in respect of work done and materials supplied
to the Executive Engineer and undertook regularly to make over to the complainant all
cheques drawn by the Executive Engineer in his favors and subsequently in violation of
the said contract cashed two such cheques and appropriated the proceeds. It was held that
the accused had committed criminal breach of trust.
Even where a person has not been entrusted with the property comes to have a dominion
over it can be guilty of misappropriation, in order to establish entrustment of dominion
over property to an accused person, the mere existence of that person ‘s dominion over
property is not enough, it must be further shown that his dominion was the result of
entrustment. Directors of a company are not trustees of the due to the company, and any
wrongful dealing by the director with the funds of the company does not amount to
criminal breach of trust.
41.Hire Purchase Agreement. -One ‘C’ agreed to purchase a motor lorry, paying the price
by installments. Meanwhile, he signed an agreement with the owner by which describing
himself as the hirer, he undertook to pay certain installments, to ensure the vehicle hired
and not to deal with it, to allow owners to recover possession in case of default and
admitted to lorry would remain the property of the owners until all the installments due
were paid. It was held that when ‘C’, in spite of the agreement, sold the lorry before the
installments were paid, was guilty of criminal breach of trust. In a criminal breach of trust,
the property remains with the person entrusting and the person entrusted does not have any
right in the property.
The second ingredient in a case of criminal breach of trust is dishonest intention. It
has to be established that the accused dishonestly misappropriated or converted to his own
use the property. Temporary retention of money would not by itself amount to criminal
breach of trust. The mere failure to deposit the money would not, therefore, prove
dishonesty, there must be other circumstances to prove the element of dishonesty and
unless the element of dishonesty is proved, the mere retention of money would not by
itself constitute the offence. False explanation is sufficient to prove the element of
dishonesty. The mental act of appropriation must be established, but actual expenditure of
the money is not the only proof. Mere retention of goods by a person without
misappropriation does not constitute criminal breach of trust.
42.Willful omission to account. -If a person receives money, which he is bound to account
for, and does not to do so, he commits the offence although no precise time can be fixed at
which it was his duty to pay the money. Where an employee fails to render accounts and
to deliver up the moneys realized by him in spite of repeated demands, he uses the
property entrusted to him in violation to the legal contract made by him with his master
and is guilty of an offence under section 408.
As already stated, it is not necessary or possible in every case of criminal breach of
trust to prove in what precise manner, the money was spent or appropriated by the
accused, because under the law even “temporary retention” is an offence provided it is
dishonest. The essential thing to be proved in such cases in whether the accused was
221
actuated by dishonest intention or not. (Queen Empress vs. Kellie) The failure to account
for the money proved to have been received by the accused or giving a false account as to
its use is generally considered a strong circumstances against him. The mental act or intent
to deprive the master of his property is the gist of the offence. If a servant immediately on
receiving a sum for his master enters a smaller sum, he may be considered to be
embezzling the difference at the time he makes the entry. It will make no difference,
though he received other sums for his Master the same day and in paying those and the
smaller sum to his master together he might have given his master every piece of money
or notes he received at the time he made the false entry. It is not necessary to prove that
any particular sum or sums were an amount forming the balance of a large number of
receipts and payments; this was help to be sufficient.
43.Willfully suffers any other person: The second part of section 405 says that whoever
willfully suffers any other person “to misappropriate or convert any property commits
criminal breach of trust. Willfully suffering makes a man liable. ”Willful” means
deliberate or intentional and not accidental or by inadvertence. Where a person willfully
suffers to misappropriate the money entrusted to him, he commits the offence of criminal
breach of trust under section 405 in as much as if he himself had misappropriated it. His
plea that he did so under the instructions of his superiors can afford him no protection.
44.Evidence –to make out a case of criminal breach of truest, which is the commonest
offence relating to the funds of a co-operative society, it has to be established that not only
the accused has retained the money, but that he has disposed off the same in some way
other than that in which he was bound to apply it and that he did so dishonestly. The mere
fact that the accused did not at once apply the money to the purpose for which it was
intended does not amount to criminal breach of trust. There must be some dishonest use of
money to constitute the office. Although mere retention of money does not necessarily
raise a presumption of dishonest misappropriation to one’s own use dishonest
misappropriation may sometimes be inferred from the circumstances without due
evidence. Thus, when cash is drawn from for making small disbursements such as
payment of wages of staff when a very large amount is held as cash on hand, in utter
disregard to the provisions of the byelaws of the byelaws of the society, a presumption can
be made that the cash on hand has been misappropriated. Nearly establishing that false
entries have been made to be led that the accused attempted to suppress all traces of his
embezzlement by manipulation of the accounts, or evidence of the financial circumstances
of the accused will have to led which would render probable a case of misappropriation.
45.Section 408. - Criminal breach of trust by clerk or servant –Clark- In modern usage,
the term would mean a writer in an office, public or private, for keeping accounts or
entering minutes.
46.Servant, Master and servant – A relation whereby a person calls in the assistance of
other where his own skill and labor are not sufficient to carry out his own business or
purpose.
Bring the accused within the purview of section 408; it will have to be proved
[1] That accused was the clerk or servant of the person reposing trust;
[2] That he was in such capacity entrusted with the money or property or entrusted with
dominion over it
222
[3] That he committed criminal branch of trust in respect of such money or property.
Actual conversion need not be proved. A mental Act, of fraudulent appropriations will
however, have be proved.
47.Violation of legal contract. -Where a person taking goods on approval under an

agreement that the property therein was to pass on approval, only if he exercised his
option to take them and paid cash in full for certain articles and in part for others, the trust
continues till the option is exercised and cash payment made and he commits criminal
breach of trust, if he sells them without such payment.
The manager of a bank received G. P. notes from a customer as security for an
overdraft granted to him. Before the overdraft was cleared, the Manger returned the
promissory notes without showing them as returned in the books of the bank, which
continued to show that they were still deposited with it. The customer having got back his
G. P. Notes repledged them with another banker. It was held that the Manager was guilty
of criminal breach of trust and the constituent of the abetment thereof.
Where the secretary of a Cooperative society converted the money of the society in
his hand to his own use or expended the same for purpose other than those of the society,
and falsified account books to cover up his embezzlements, the secretary was guilty of
offences under Sections 408 and 477. ( Joy Shankar V. Sushil Kumar 1969 cr. J.) Where
the accused, Secretary of a cooperative Society was entrusted with the amount, gave that
amount to the president of the society and purchased wheat for another member of the
society. The president did not return the amount, the member also did not for the wheat,
the accused dishonestly misappropriated and willfully suffered these two persons to
convert to their own use the property ;of the society, was guilty of criminal breach of trust.
(Kundanlal v. state 1976 cr. J.) Where the accused representing himself as manager of a
Gram Sahakari Samiti collected loan amount from the subscribers of the Samiti, did not
deposit the collected amount in bank, he was held guilty of offence under the section. The
president and Secretary of a Cooperative Society are not public servants and whey they
commit embezzlement, section 408 applies to them. When a Secretary of a Cooperative
Society entrusted with the surplus funds of the society, utlises the same for his won
purpose, he is guild of misappropriation of funds. Where the Secretary of a Cooperative
Society returned a certain amount of the society, a direction by him to accountant of the
society to make a wrong cross entry was only susceptible of the inference that he wanted
to misappropriate the amount. (Kantilal v. State of Gujrat AAIR 1974) Mere entry in
books of account unsupported by any oral evidence cannot prove entrustment.
48.Section 409. -This section clubs together public servants, bankers, merchants’
factors, brokers, and attorneys. The word “banker” in this section has not been used in the
technical sense of the Banking Regulation Act, but any person or firm doing the customer
business of banking, is a banker for purposes of this section. Merchant is a person who
traffics in goods in remote countries, i.e. an importer or exporter and in the ordinary sense
also any one engaged in the purchase and sale of goods. Factor is an agent to sell goods,
for a commission. Broker is an agent employ to make bargains and contracts between
other persons in matters of trade, commerce and navigation. A factor is entrusted with the
disposal of the property while a broker is employed to contract about it without being in
possession of goods. Attorney is one who is appointed by another to do some thing in his
absence and who has authority to Act, in place and turn of the person by whom he is
delegated.
To establish a charge of criminal breach of trust the prosecution is not obliged to
prove the precise mode of conversion, misappropriation or misapplication by the accused
223
of the property entrusted to him or over which he has dominion. The principal ingredient
of the offence being dishonest misappropriation or conversion which may not ordinarily
be a matter of direct proof, entrustment of property and failure in breach of an obligation
to account for the property entrusted if prove, justifiable lead to inference of dishonest
misappropriation.
To justify conviction under Section 409, the prosecution must prove factum of
entrustment and factum of misappropriation. Mere an audit report of inconclusive nature
cannot form basis of conviction.
Office bearers of a society are not public servent within the meaning of Section 21
of the Indian Penal Code and they cannot be prosecuted under section 409 of the Indian
penal code. ( Hanumant Patil Vs. State of Maharashtra, 1993(2) Bom. C.R. 286 and state
of Maharashtra Vs. Laljit Shah, 1994 Mah L.J.)
49.Cheating. -Section 415 defines cheating. This is a very wide section and deals with
almost all the aspects of cheating. A dishonest concealment of fact is also deception within
the meaning of the section. Unlike in other offences, in the case of cheating, the offender
obtains not only possession of the property, but also sustains property in it. Cheating,
criminal breach of trust and criminal misappropriation are all distinct offences. Cheating
differs from the last two offences in the fact that the cheat takes possession of the
property by deception. There is wrongful gain or loss in both the cases and there is
inducement to deliver the property.
50.Deceiving means causing to believe what is false or misleading as to a matter of fact

leading to error. It is not sufficient to prove that a false representation has been made, but
it is further necessary to prove that the misrepresentation was false to the knowledge of
the accused, and was made in order to deceive the complainant. It is not necessary that the
false pretence should be made in express words; it can be inferred from all the
circumstances attending the obtaining of the property or conduct of the person. If a person
obtains goods on credit promising to pay for them on a particular day, knowing that it was
impossible for him to pay, or draws cheques knowing that the bank balance was
insufficient and the cheque would not be honored, it would amount to cheating.
Under section 417, punishment for cheating is one year. Cheating with knowledge
that wrongful loss may ensue to person whose interest the offender is bound to protect
invites higher punishment under section 418. This section applies to cases of cheating by
guardians, trustees, solicitors, agents, managers of Hindu Joint families, directors and
managers of joint stock companies, and of co-operative societies, in fraud of the members
or shareholders. It is the abuse of trust that is met with a more safer punishment.
Presenting a false balance sheet by the directors and managers of the bank to induce
depositors to renew their deposits which they would not have otherwise done or putting a
false balance sheet in material respects, before the share holders or members which they
knew to be false and likely to mislead the public as to the condition of the bank and
concealed its true condition, would constitute offences under this section and the directors
and mangers have been held liable
51.Wrongful lossand gain: the Section 23 of the Indian penal Code defines ‘wrongful loss
as. “Wrongful loss” the loss by unlawful means of property to which the person losing it is
legally entitled. It further defines that. A person is said to lose wrongfully when such
person is wrongfully kept out of any property, as well as when such person is wrongfully
deprived of property.
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This section also defines wrongful gain, as “Wrongful gain” is a gain by unlawful
means of property to which the person gaining is not legally entitled. A person is said to
gain wrongfully when such person retains wrongfully, as well as when such persons
acquires wrongfully.
A person can be said to have dishonest intention if in taking the property it is his
intention to cause gain, by unlawful means, of the property to which the person so gaining
is not legally entitled or t cause loss, by wrongful means, of property to the person so
losing is legally entitled. The gain or loss need no be a total acquisition or a total
deprivation, by it is enough if it a temporary retention of property by the person
wrongfully gaining or a temporary keeping out of property from the person legally
entitled. Wrongful gain includes wrongful retention and wrongful loss includes being kept
out of the property as well as being wrongfully deprived of property.
52.Dishonestly: The section 24 of the Indian penal code defines it as, “ whoever does
anything with the intention of causing wrongful gain to one person or wrongful loss to
another person, is said to do that thing “dishonestly”.
Dishonest intention has got to be proved. A dishonest intention may be presumed only if
an unlawful act is done or if lawful act is done by unlawful means.
53. Chating:Section 420, which deals with cheating and dishonestly inducing delivery of
property, is an important section and quite a number of offences in co-operative societies
come within the purview of this section. Simple cheating is punishable under section 417,
but when there is delivery or destruction of any valuable security, resulting from the. Act,
of the person deceiving, this section comes into operation. For conviction under this
section, it must be proved that the complainant parted with his property, acting on a
representation, which was false to the knowledge of the accused and that the accused had
a dishonest intention from the outset. Where a person whose duty it was to report the
current rates in the market by arrangement with persons in the market reported rates higher
than those really current and in consequence of which higher rates were paid to the sellers,
than they were entitled, it was held that he was guilty of offence under this section.
Assisting to obtain larger advances against a consignment sent by rail, which was made to
show a higher quantity by tampering with the railway receipts, has been held to be an
offence under this section.
In a case the accused executed a hypothecation bond in respect of property
representing that the property belonged to him and there were no encumbrances on the
property, and succeeded in getting money from the complainant but in fact the property
did not belong to the accused, a fact which was in the knowledge of the accused from the
very beginning, the accused is guilty under section 420.
When the accused by making fraudulent representations obtained loan from the
Bank, they were held guilty of the offence of cheating. Where the accused Manager of the
bank passed a certain cheque which resulted in loss to the bank, the accused was negligent
in the sense that he had not observed that the specimen signature card of the drawer had
not been authenticated by any bank official and the drawer had not been introduced by any
one, the accused was negligent in the performance of his duty, but was not guilty, of
cheating.
Section 423 deals with dishonest or fraudulent execution of deeds of transfer
containing false statement of consideration. Under this section, dishonest execution of a
Benami deed is punishable. Where the consideration for the sale of immovable property
was with the consent of the purchaser exaggerated in a deed of sale in order to defeat the
claim of the presenter, it was held that the purchaser was guilty of this offence.
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Section 424 deals with dishonest or fraudulent removal or concealment of

property. This section covers cases, which do not come within the purview of sections 421
and 422. It contemplates such concealment or removal of property from the place where
it is deposited as can be considered fraudulent. It also covers dishonest or fraudulent
release of any demand or claim to which the offender is entitled.
54.Forgery. -Forgery is defined in section 463, as making of a false document or false

electronic record or part of a document or electronic record in the next section, section
464, deals with the making of a false document or electronic record. It will be seen that the
definition of forgery given in the Code is not as simple or clear as the definition of forgery
in common law. Forgery as is commonly understood means fraudulent making or
alteration of a writing to the prejudice of another man’s right.
The simple making of a false document would not amount to forgery as defined in
the section. What amounts to making of a false document is explained in section 464, to
constitute the offence of forgery under section 463, the following ingredients are
necessary: -
1) The making of a false document or false electronic record or part of it;
2) Such making should be with intent to-
a) Cause damage or injury to public or and person; or
b) To support any claim or title; or
c) To induce any person to part with any property; or
d) To cause any person to enter into any express or implied contract; or
e) To commit fraud or that fraud may be committed.
The essential ingredients of Section 464 are: a) that fraudulently signing, making,
executing, making seal on, transmitting any electronic record or part of any electronic
record, affixing any digital signature or any electronic record, making any mark which
denotes the execution of the document or authenticating any digital signature. A document
or a part of a document, electronic record or digital signature with an intention of causing
it to be believed that such document or part of a document electronic record or digital
signature was signed. Sealed, executed, transmitted or affixed by another or under his
authority.
(b) Making such a document with an intention to commit fraud or that fraud may be
committed.
Secondly if any person without lawful authority, dishonestly or fraudulently, by
cancellation or otherwise, alters a document or an electronic record in any material part
thereof, after it has been made, executed or affixed with digital signature either by himself
or by any other person, whether such person be living or dead at the time of such
alteration;
And thirdly, if any person, causes any person to sign, seal, execute or alter a
document or an electronic record or to affix his digital signature on any electronic record
knowing that such person by reason of unsoundness of mind or intoxication cannot, or that
by reason of deception practiced upon him, he does not know the contents of the document
or electronic record or the nature of the alteration, commits forgery under section 464.
55.Fraudulently: Section 25 defines “ fraudulently” as, A person is said to do a thing

fraudulently if he does that thing with intent to defraud, but not otherwise.
The expression defraud involves two element, namely, deceit and injury to the
person deceived. Injury is something other than economic loss that is, deprivation of
property, whether movable or immovable, or of money and it will include any harm
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whatever caused to any person, mind, reputation, or such other. It is a non-economic or

non-pecuniary loss.
56.Document: A writing is a document. However, it is not necessary that in every case a

document should be in writing or contain the signature or facsimile of any person. It
includes what is done by way of printing.
Section 29 of Indian penal code defines document as, it denotes any matter
expressed or described upon any substance by means of letter, figures or marks, or by
more than one of those means intended to be use, or which may be used, as evidence of
that matter.
The Evidence act also defines document in section 3 as, “Document means any
matter expressed or described upon any substance by means of letter, figures or marks, r
by more than one of those means, intended to be used, r which may be used, for the
purpose of recording that matter. As per illustration given under the section it includes;
a) a Writing is a document.
b) Words printed, lithographed or photographed are documents.
c) A map or plan is a document.
d) An inscription on a metal plate or stone is a document.
e) A caricature is document.
Section 470 defines a forged document or electronic record as a false document
or electronic record made wholly or in part by forgery and section 471 lays down that
whoever fraudulently or dishonestly uses as genuine, any document, or electronic record,
which he knows or has reason to believe, to be a forged document or electronic record,
shall be punished in the same manner as if he had forged such document or electronic
record. What is required to be proved is-
1) Fraudulent or dishonest use of a document or electronic record, as genuine;
and
2) Knowledge or belief on the part of the person that the document or
electronic record is a forged one.
57. Forgery of valuable securities: Section 467 deals with forgery of valuable securities,
wills, etc. An extremely sever punishment, viz., imprisonment for life, 10 years and fine,
has been prescribed for the forgery of the following types of documents: -
1) A document which purports to be a valuable security;
2) A will;
3) An authority to adopt a son;
4) A document which purports to give authority to any person-
a) To make or transfer any valuable security, or
b) To receive the principal or interest or dividends thereon, or
5) To receive or deliver any money, moveable property or valuable security:
6) Any document purporting to be-
a) An acquaintance or receipt acknowledging the payment of money,
b) An acquaintance or receipt for a delivery of any moveably property or
valuable security.
58. Forgery for Cheating: Secretion 468 prescribes punishment for forgery for purpose
of cheating.
Having possession of a forged document or electronic record, knowing it to be
forged and intending to use it as a genuine document constitutes an offence under section
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477-A- This section, which deals with falsification of accounts and making of false entries
in books is a very important section. The section deals with two distinct offences: -
1) Falsification of accounts; and
2) Making or abetting the making of false entry or omitting or altering or abetting
omission or alteration of an entry.
This section makes falsification of accounts punishable although there is no
evidence to prove misappropriation, of any specific sum or on any particular occasion.
The section requires the falsification of accounts with intent to defraud and does not
require any deprivation of any property. In an old case decided by the Madras High Court,
the officers of a co-operative store, ho made false entries in the accounts, were held guilty
under this section even though no one lost eventually by such false entries.
To establish a charge under this section, the following essentials will have to be
fulfilled: -
1) The person coming within its purview must be a clerk, officer or servant or acting
in the capacity of clerk, officer or servant;
2) He must willfully and with intent to defraud-
(a) Destroy, alter, mutilate or falsify any book, electronic record, paper, and writing,
valuable security or account which-
(b) Belong to or is in possession of his employer; or
(c) Has been received by him for or on behalf of his employer; or
B) Make or abet the making of any false entries, or omit or alter or abet the omission or
alteration of any material particular from or in, any such book, electronic record, paper,
writing, valuable security or accounts.
59.Clerk or servent: The words “acting in the capacity of a clerk or servant” are very
wide terms and included a person who undertakes to perform and does perform the duties
of a clerk or servant, whether in fact, he is a clerk or servant or not and although he is
under no obligation to perform such duties and receives no remuneration. The Chairman
or a committee member of a society, who writes the cashbook and other books of
accounts, or issues receipts, although these are no part of his duties, comes within the
purview of this section, since he has undertaken to do these duties and has done them. A
person who voluntarily performs the duties of a clerk, officer or servant and falsifies the
accounts also commits offence under this section. ( Abdul Aziz vs. Emperor 1953). It has
to be noted that the falsification can only be committed in respect of books of the
employer. The Cashier’s Diary, Rough Cashbook or Counter Cashbook maintained by the
cashier in a bank belongs to the employer as it is maintained in the ordinary course of
business and the Cashier cannot claim it as his own or in any way belonging to him.
60.Willfully and with intent to destroy, etc, -Willfully means that the act is done
deliberately and intentionally, not by accident or inadvertence, but so that the mind of the
person who does the act, goes with it. Even if the intention with which the false entries are
made is to conceal fraudulent or dishonest act, previously committed, the intention will be
to defraud (Emperor vs. Ragho Ram (AIR 1933). Making a false document with a view to
prevent persons already defrauded from ascertaining that misappropriation has been
committed and thus enabling the persons who had committed the misappropriations to
retain the wrongful gains which they had secured, amounts to the commission of a fraud
and brings the case within the purview of this section. The issuing of a false statutory
report of a company calculated to deceive the public and intended to induce them to invest
their money in the company, which they would not otherwise have invested, is an act,
done with intent to defraud. Promoters of bogus co-operative housing societies, who offer
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residential flats, shop office premises or garages on attractive terms and given assurances
of loan facilities, knowing that neither Government nor the Housing Finance Society have
agreed to lend, can be hauled up under the provisions of this section.
It has been held that where alterations have been made not with any intent to
defraud, but merely to comply with the requirements of departmental rules, no offence is
committed. It has also to be noted that the alteration should be in the handwriting of the
accused in order to convict him.
61.Falsification. -The expression “falsification” applies to the preparation of an entirely

new document containing false information is correctly described as a false document and
the act of preparing such document is called falsification of the document.
62.Accounts. -The offence is completed when accounts are falsified with intention to
defraud. An alteration in the accounts made after embezzlement will come within this
section, if it is part of the scheme to deprive another of his money. But the alteration of
accounts without intention to commit fraud is not an offence under this section. Making
false entries in books of accounts of a society by a person in order to conceal fraudulent or
bogus transactions falls within the purview of this section and deprivation of property
either actual or intended is not a necessary ingredient to defraud as contemplated in this
section. The secretary of a co-operative society, who has misappropriated a large cash
balance, in order to conceal the misappropriation, makes a bogus entry debiting the loan
account of a member and forges his signature on the loan bond, commits an offence not
only under section 408, but also under section 477-A. If the intention with which a false
document is made is to conceal a fraudulent or dishonest act, which had been previously
committed, the intention cannot be other than intention to defraud. The concealment of an
already committed fraud is a fraud.
63.Electronic Record: Section 29 A of the Indian penal code defines the electronic
records, as definition given in the clause (1) of sub-section (1) of the section 2 of the
Information Technology Act, 2000. The definitions is explained in chapter describing
InformationTechnology Act, provisions.
64. Fabricating false evidence Section 192. -Section also deals with a similar offence,
viz., fabricating false evidence, but with a different intention. This section refers to the
making of any false entry in any book or record or electronic record, or making any
document or electronic record, containing a false statement, intending that such false entry
or false statement may appear in evidence in a judicial proceeding or in a proceeding
taken by law before a public servant as such or before any arbitrator and that such false
entry or false statement so appearing in evidence may cause any person, who, in such
proceeding, is to form an opinion upon the evidence, to entertain an erroneous opinion
touching any point material to the result of such proceeding. Auditors and officers
appointed under section 83 and 88 of the Maharashtra Co-operative Societies Act have
been declared to be public servants. Accordingly proceedings before these officers are
proceedings before public servants and as such act specified above done by office-bearers
and employees of co-operative societies come within the purview of this section. Thus,
entries intentionally made to reduce the cash balance such as fictitious debits, bogus
advances, benami loans etc. Would come within the purview of this section. Intention is
the gist of the offence of fabricating false evidence. The false evidence must be material
to the case. As soon as the evidence is fabricated or false statement made, the offence is
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committed. It is not necessary that such evidence is actually used. However, the fabricated
evidence must be admissible evidence.
65. Acts done by several persons Section 34. -Many times, offences are committed by two
or more persons acting jointly. Several persons may come together and commit an offence.
In such cases, it may be difficult to distinguish between the acts, of individual members of
a party or to prove exactly what part was taken by each of them in furtherance of the
common intention of all. Section 34 deals with acts, done by several persons in
furtherance of the common intention of all, each of such persons is liable for that act, in
the same manner as if it was done by him alone. The section embodies the principle that if
two or more persons intentionally do a thing jointly, it is just the same if each of them had
done it individually. However, before a person can be held liable for an act, done by
another, the section requires that it should be established that, firstly, there was a common
intention in the sense of a pre-arranged plan, secondly the person sought to be held liable
had participated in some manner in the act, constituting the offence. Both common
intention and participation have to be present before the section can apply.
66.Criminal Conspiracy: Acting on a common intention also constitutes criminal

conspiracy and is the subject matter of section 120-A. to constitute criminal conspiracy, it
is necessary to prove-
That there was an agreement between two or more persons-
1) For doing an illegal act, or;
2) For doing by illegal means an act, or which may not itself be illegal.
However, no agreement except an agreement to commit an offence shall amount to
criminal conspiracy unless some act, besides the agreement is done by one or more parties
to such agreement in pursuance thereof. It is immaterial whether the illegal act is the
ultimate object of such agreement, or is merely incidental to that object.
The gist of the offence is the bare engagement and association to commit an illegal
Act, or offence.
Section 34 and section 120-A contain similar provisions. There is not much
substantial difference between criminal conspiracy defined in section 120-A and acting on
common intention as contemplated in section 34.
SPECIAL REPORT
C- Report Writing
67.Need to submission of Special Report: As per Section 81 (5B), if auditor finds that
there are apperent instances financial irregularities resulting into losses to the society
caused by any member of committee or officer of society or by any other person, then he
shall make special report and submit it to the Registrar along with audit report. Failure to
file special report would amount negligence in the duties of auditor and he shall be liable
for disqualification for appointment as an Auditor or any other action as the Registrar
thinks fit.
Circumstances in which Specific report is required to be submitted :-
requires reporting
1 Fraud 1) Debiting excess amount During the period under audit
than the voucher amount / bill fraud of Rs.------ is detected.
amount. The said fraud has been
2) Withdrawing the amount committed by using ---------
from bank but not crediting in modus operandi (without
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cash book security / fabricated

3) Debiting the bank account documents / false security,
without depositing the amount etc.). The following persons
in bank are responsible for fraud.
4) disbursing loans without 1….
sanction / without security / 2…
without loan documents / 3…
using forge documents
5) any other transaction with
the intention to defraud the
society by any person.
2 Misutilisation When the funds are not used During the audit period, funds
of funds and by following due procedures and properties of societies are
properties E.g. misutilised as under :-
1) purchasing / constructing 1…
building without inviting the 2…
tenders 3…
2) purchasing the computers
without inviting the tenders.
3) selling the movable /
immovable properties without
inviting bids
4) selling the movable /
immovable properties below
Reserve Price (Upset price)
3 Misapplication If the society raises the fund During our audit period, we
of funds for the particular purpose but have found following
uses them for another purpose, misapplication of funds.
then there is misapplication of 1…
funds. E.g. 2…
1) State Government has 3…
granted loan for construction
of go-down, but use for
payment of salary or other
regular payments.
2) Use of sinking fund for day
to day maintenance without
passing required resolution in
General Body.
3) Use of revenue reserve /
general reserve for creating
Reserve for Bad and Doubtful
Debts.
4) Not using Government
share capital redemption fund
for repaying Government debt
/ capital on due date.
4 Manipulation of 1) Crediting interest received We have found following
accounts account without being amount manipulation / window
actually realized In dressing of accounts during
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contravention of Income our audit period.

Recognisation Asset 1…
Classifaction (IRAC) norms. 2…
2) Loans showing to be 3…
recovered without actually
being recovered by debiting
new loan account.
3) Window dressing of
accounts. E.g. loan account
debit deposit account credit
without deposit actually being
received.
5 Falsification of 1) Amount recovered from one We have found the following
accounts party and credited to other falsification of accounts
party there by showing during our audit period.
incorrect position of state of 1…
affairs. E.g. A’s account has 2…
become NPA. B’s account is 3…
in PA category. Amount
received from B is credited to
A’s account to conceal NPA.
2) Showing stock items and
value of stock when there is no
stock is in existence.
IX-8. FOLLOW-UP AUDIT:

RECTIFICATION OF ERRORS POINTED OUT IN AUDIT
1. Legal provisions. -As we have seen, co-operative audit is not merely critical, but
curative. The duties of the auditor of a co-operative society do not end merely by pointing
out errors and irregularities noticed by him, but he has also to suggest ways for avoidance
of their repetition. It is, therefore, necessary that the society follow-up the suggestions
made by the auditor and takes due steps to remedy the defects pointed out by him in his
audit memo.
Section 82 of the Maharashtra Co-operative Societies Act, requires every society to
explain to the Registrar, within three months of the receipt of the audit report in ‘O’ Form,
the defects or irregularities pointed out by the auditor and take steps to rectify the defects,
remedy the irregularities and report to the Registrar the action taken by it thereon. The
Registrar may also make an order directing the society or its officers to take such action as
may be specified in the order to remedy the defects within the time specified therein.
Since the federal society to which the society is affiliated is also interested in its
development and improvement, the section requires that where a society is a member of a
federal society, an order under section 82 shall be issued after consulting the federal
society. Federal society shall communicate its opinion to the Registrar within a period of
45 days from the date of receipt of communication, failing which it shall be presumed that
such federal society has no objection to the proposed action by the Registrar. If the
committee of the society fails to submit the audit rectification report to the Registrar and to
Annual General Body Meeting, all members of committee shall be deemed to have
committed offence under Section 146 and liable for penalty as provided in Section 147.
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It shall be the responsibility of the auditor concerned to offer his remarks on the
rectification report of society item wise, till entire rectification is made by society and
submit his report to the Registrar.
The Registrar or the person authorized by him shall scrutinize the audit
rectification report and inform the society within six months from the date of receipt
thereof.
Sub-Section (4) of section 87 provides that if a society fails to rectify the defects
disclosed in the course of or as a result of audit under section 81 or fails to rectify the
defects as directed by the Registrar, the Registrar may himself take steps to have the
defects rectified and may recover the cost from the officer or officers of the society, who,
in his opinion, has or have failed to rectify the defects.
Sub-Section (1) of section 79 also empowers the Registrar, among other things, to
submit to him such statements and returns as he may require from time to time; and the
officer or officers of the society shall be bound to comply with his orders within the period
specified therein. Sub-section (2) further provides that where any society is required to
take any action under this Act, the Rules or the bye-laws or to comply with in order made
under the foregoing sub-section (i.e. sub-section (1) of section 79 quoted above) and such
action is not taken within the time provided in this Act, the Rules or the bye-laws, or the
order as the case may be, or (b) where no time limit is so provided within such time,
having regard to the nature and extent of the action to be taken, as the Registrar may
specify by notice in writing, the Registrar may himself, or though a person authorized by
him, take such action at the expenses of the society; and such expense shall be recoverable
from the society as if it were an arrears of land revenue.
6. Action to be taken by the District Deputy Registrars and the Divisional Joint
Registrars. -The importance of follow-up of audit requires no emphasis. It needs hardly be
pointed out that unless prompt action is taken to remove the defects noticed in audit,
audit would loose much of its efficacy. It should, therefore, be impressed on the societies
that the defects pointed out by the auditors are to be promptly rectified and the suggestions
made by them implemented as early as possible. The societies should also be told that
avoids their recurrence. As such, vague and non-committal replies, such as “Noted”,
“Necessary action will be taken in due course”, “will be placed before the Committee”,
etc., should not be accepted. The society should have taken definite action to rectify the
irregularity and offered satisfactory explanation. It has to be noted that the responsibility
of the District Deputy Registrars and the Divisional Joint Registrars does not end merely
by calling attention of the society to the points contained in the audit memos. Section 82 of
the Maharashtra Co-operative Societies Act empowers the District Deputy Registrars and
the Divisional Joint Registrars to issue directives to the societies and their office-bearers
and compel them to take specific action to rectify the irregularities within a specific time.
It is, therefore, necessary that the audit memos of all societies received by them are
carefully reviewed and necessary action taken thereon. It has been noticed that a number
of frauds and embezzlements could have been avoided. In cases of serious irregularities,
frauds and misappropriations, auditors have been asked to submit special reports. Where
frauds and embezzlements have been reported, the Deputy Registrars and the Divisional
Joint Registrars should take immediate action and institute criminal prosecutions against
the culprits. In some cases, action under provisions of section 88 will have to be taken.
Wherever necessary, a further report or additional information may be called for from the
auditors. As regards launching of criminal cases, instructions issued by the Registrar and
Government should be strictly followed.
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The Administrative Officers have also been armed with adequate powers to deal
with defaulting societies, which pay no attention to the irregularities pointed out by the
auditors. Wherever necessary, proceedings should be instituted under section 146 of the
Maharashtra Co-operative Societies Act. Where serious irregularities have been reported,
inquiry under section 83 may have to be ordered and the defaulting office-bearers made to
pay the cost of inquiry. In extreme cases, action to supersede the committee under
provisions of section 78 may also have to be taken. The financing Agency may also have
to be asked to stop credit to the society or recall the loan sanctioned to it, unless the
society agrees to take necessary action to mend its ways. Where, however, no serious
irregularities have been reported and the societies have taken due steps to rectify the
defects pointed out, no review may be necessary. However, in all cases, where serious
irregularities have been reported or the societies have not been attending to the suggestions
of the auditors, the administrative officers should review the audit memos, and the audit
rectification reports and communicates their observations to the societies concerned.
IX-9 Remuneration of Auditor :-

1. Historical retrospect. - The rates are revised for various types of societies by the
Registrar as mentioned below. Section 81 (f) states that, “Remuneration of auditor shall be
borne by society and shall be at such rates as may be prescribed”. Considering this Rule 74
reads as follows :- “Remuneration of auditor shall be borne of society and shall be at such
rates as may be notified by Government:. Considering this legal provision, Government of
Maharashtra has vide its notification dated 29/10/2014 issued revised structure of audit fee
for all types of societies which is applicable from Financial Year 2014-15. Before this
rates of audit fees were decided by the Commisioner for Co-operation and Registrar for
Co-operative Societies, Maharashtra State, Pune vide circular dated 15/05/1992.
Previously audit of some bigger societies was carried out by departmental auditors on
current and concurrent basis like MSC Bank, DCC Bank, Marketing federation, etc. Audit
fee of these societies was decided on the basis of pay, travelling allowance and dearness
allowance of the departmental auditors who were carrying out current and concurrent
audit. After amendment in Co-operative Societies Act in 2013, system of current and
concurrent audit is dispensed with. Therefore, the rates of audit fees of these societies are
also decided by above Government notification. The Government notification regarding
audit fee dated 29/10/2014 is reproduced in Annexure s
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Co-operative Societies Audit Manual

[CO-OPERATIVE AUDIT MANUAL

2. Historical retrospect. - Audit of co-operative societies, traditionally has been audit by

4. Developments during 1974-2012. - In view of the above considerations, the provisions

Accordingly the Section 81 of the Maharashtra Cooperative Societies Act is entirely

3. Financial auditing is a review of the results of past actions. Administrative auditing is

5. Operational efficiency and Ratio Analysis :- Operational efficiency is measured by

7. Recent changes in Cooperative Audit :- After 97th constitutional amendment, the

at National and International level by concerned accounting bodies. The recording of

I-4 AUDIT: MEANING AND SCOPE

2. Definition of Audit. -The concept of audit, however, has undergone considerable

3. Purpose of Audit : - Detection of frauds and errors. -Examinations of accounts by an

I-5 DUTIES AND RESPONSIBILITIES OF AUDITORS

I-6 COOPERATIVE SOCIETIES AUDIT: FEATURES AND DIFFERENCES

2. Other distinguishing features: - A joint stock company is undoubtedly an association

4. Examination of overdue debts: - Examination of overdue debts, as we have seen has

6. Adherence to Co-operative principles. - Co-operation is a method of doing business

9. Personal verification of members and examination of their pass books: - We have

11. Certification of Bad debts. : - Rule 49 of the Maharashtra Co-operative Societies

12-A . Adherence to Accounting Policies :- Societies have to adopt the accounting

I-7 QUALITIES OF AUDITORS

5. Independence of the Auditor;- The auditor should be independent in performing his

I-8 POWERS AND LIABILITIES OF AUDITOR

1. Powers of the Auditor: - Sub-section (3) of section 81 of the Maharashtra Co-operative

3. Additional powers. : - 1) The auditor of a co-operative society is deemed to be a public

4. Audit Memo to be considered by annual general meeting. - Sub-section (4) of section

6. Auditor to be a “public servant”: - Section 161 of the Maharashtra Co-operative

8. Consequences of disobedience of summons. - Under section 172 of the Indian Penal

II-1 ARRANGEMENTS FOR AUDIT

1. Statutory responsibility of Registrar / Society for annual audit of co-operative

2. Audit of Co-operative Societies by Auditors appointed by the Registrar / Society - The

In addition to above Sr.No. A, B and C requires knowledge of audit of co-operative

3. Preparation of Panel of auditor :- The panel of auditors is prepared by the Registrar

(11) Primary Co-operative Poultry and piggery and

(17) Primary consumers Co-operative Societies.

II-2 SCOPE OF AUDIT

35 800 Audits of Financial Statements prepared in accordance

5. Qualification to opinion: The auditor is required to state in audit memorandum reasons

7. General Terms and conditions of appointments of Auditors: whether the appointment

10 Responsibilities of the Auditor :-

11. Remuneration of Auditor : - Remuneration of auditor shall be at the rates as

II-3 DIFFERENT TYPES OF AUDITS

1. Annual audit or statutory audit. - A “periodical” or “annual” audit is generally taken

audit is systematic and accurate recording of detailed transactions and operations of

IV-1 PREPARATION FOR AUDIT AND FRAMING OF AUDIT PROGRAMS

List of members in J-1 and J-2

4. Procedure to deal with complaints. - Sometimes, complains are received by the

7. Working papers to be maintained by the auditors: The information given by the

8. Account Books and Records to be maintained by Co-operative Societies. – a) Section

12. General ledger and personal ledger.

9. Special Books and Registers to be maintained by certain types of societies . –

12. Responsibility for maintenance of accounts. -Byelaws of societies specifically lay

1) Misstatement in the financial information leads to negligence on the part of

2) Materiality of the item :- A material item would need to be supported by more

5) The type of information available. If in respect of certain items, the quality of

6) Trends indicated by accounting ratios and analysis. By correlating various factors,

IV-2 INTERNAL CONTROL

3. Management of co-operatives and internal control. –By-laws of co-operative societies

4. Points to be considered while determining quantum of detailed checking. -In deciding

5. Difficulties in evolving suitable arrangements for internal control in co-operative

6. Basic principles of Internal Control. -The basic principles of a sound system of

2) Application Control: Includes: a) file continuity b) Asset protection c) Transaction

8. Bank Reconciliation. - Bank Reconciliation statements should be prepared regularly by